Difference between revisions of "Expected return"
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| − | The expected return is the average of the possible returns, each weighted by its probability. | + | 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: | 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: | ||
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[[Category:Economics]] | [[Category:Economics]] | ||
| + | [[Category:statistics]] | ||
Revision as of 19:37, September 1, 2007
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%