Expected Return
Candlefocus EditorThe expected return is calculated by determining the probability of each given outcome and then multiplying the outcome by its probability of occurring. The sum of all results is the expected return for a particular investment. In a portfolio containing multiple investments, the expected return is the weighted average of the returns of each of the investments. The weight of each investment is determined by the amount of money invested in it.
For example, an investor may decide to construct a portfolio with a range of assets. They may invest in stocks, bonds, mutual funds, and exchange-traded funds. The expected return of the portfolio can be calculated by taking the average return of each asset and weighted based on the amount of money invested in the assets.
The expected return can be used to compare different investments and understand the risk/return profile of a portfolio or individual investments. It is also important to note that there may be a wide range of expected returns. An individual may expect to earn a certain return on an investment, but they may also suffer a significant loss.
Understanding expected return is an important part of making informed decisions about investing. It provides investors with an understanding of the probability of different outcomes and enables them to weigh the possible risks and their expected returns. Investing with an understanding of expected return helps to create a well-diversified portfolio and can assist investors in making decisions about how to allocate their resources for the greatest return.