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 probability 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
• \( p_i \) — Probability of outcome i
• \( r_i \) — Return of outcome i
• \( n \) — Number of possible outcomes

Explanation: The formula weights each possible return by its probability and sums all these weighted returns to get the overall expected return.

3. Importance of Expected Return

Details: Expected return is a fundamental concept in finance and investment analysis. It helps investors compare different investment opportunities and make informed decisions based on risk and potential reward.

4. Using the Calculator

Tips: Enter probabilities separated by commas in the first field and corresponding returns in the second field. Probabilities must sum to 1 (100%). Returns can be positive or negative percentages.

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 for possible returns, while actual return is what really happens. Actual returns may differ from expected returns.

Q2: Can probabilities be greater than 1 or less than 0?
A: No, each probability must be between 0 and 1, and the sum of all probabilities must equal 1.

Q3: How is this different from average return?
A: Expected return considers different probabilities for different outcomes, while average return typically assumes equal probability for all outcomes.

Q4: What if my probabilities don't sum to exactly 1?
A: The calculator will not compute the result as this violates probability rules. Ensure your probabilities sum to 1 (100%).

Q5: Can I use this for portfolio analysis?
A: Yes, this is a fundamental calculation used in portfolio theory, but portfolio analysis would also consider covariance between assets.