1. What is Expected Return?

The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return. It is calculated by multiplying potential outcomes by the chances of them occurring and then summing these results.

2. How Does the Calculator Work?

The calculator uses the expected return formula:

Where:

• \( E[R] \) — Expected return
• \( probability \) — Probability of each scenario (must sum to 1 or 100%)
• \( return \) — Return in each scenario

Explanation: The formula accounts for all possible scenarios, their probabilities, and their respective returns to calculate the weighted average return.

3. Importance of Expected Return

Details: Expected return helps investors make decisions by quantifying the potential reward of different investment options. It's fundamental in portfolio theory and risk assessment.

4. Using the Calculator

Tips: Enter probabilities as percentages (must sum to 100%) and returns as percentages. The calculator will compute the weighted average expected return.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between expected return and actual return?
A: Expected return is a statistical measure of central tendency, while actual return is what really occurs. They often differ due to unforeseen events.

Q2: Can I add more than two scenarios?
A: This calculator handles two scenarios for simplicity. For more scenarios, you would sum (probability × return) for each additional scenario.

Q3: What if my probabilities don't sum to 100%?
A: The calculator will show an error. Probabilities must be exhaustive and mutually exclusive, summing to exactly 100%.

Q4: How is this used in portfolio management?
A: Expected return is combined with risk measures (like standard deviation) to optimize portfolios using Modern Portfolio Theory.

Q5: Can expected return be negative?
A: Yes, if the potential losses outweigh the potential gains in the scenarios considered.