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Expected return (view source)

Revision as of 13:24, May 22, 2007

378 bytes added ,  13:24, May 22, 2007
New page: The expected return is the average of the possible returns, each weighted by its probability. For example, if an investment has a 50% chance of earning a 5% return, a 25% chance of earn...
The expected return is the average of the possible returns, each weighted by its probability.

For example, if an investment has a 50% chance of earning a 5% return, a 25% chance of earning 10% and a 25% chance of losing 10%, then its expected return would be calculated as follows:

:Expected Return = (0.5) (0.05) + (0.25) (0.1) + (0.25) (-0.1)
:= .025 + .025 - .025
:= 2.5%
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