Expected Rate of Return Calculator Stock Market

Expected Rate of Return Formulas:

\[ \text{Historical Average} = \frac{\sum \text{Annual Returns}}{\text{Number of Years}} \] \[ \text{CAPM} = R_f + \beta \times (R_m - R_f) \]

Calculation Method:

Annual Returns (%):

Expected Rate of Return:

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1. What is Expected Rate of Return?

The expected rate of return is the profit or loss an investor anticipates on an investment that has known or expected rates of return. It's a key concept in finance for evaluating potential investments.

2. Calculation Methods

The calculator provides two methods to estimate expected return:

Historical Average: \[ \text{Expected Return} = \frac{\sum \text{Annual Returns}}{\text{Number of Years}} \] Capital Asset Pricing Model (CAPM): \[ \text{Expected Return} = R_f + \beta \times (R_m - R_f) \]

Where:

\( R_f \) — Risk-free rate (typically 10-year Treasury yield)
\( \beta \) — Stock's volatility relative to the market
\( R_m \) — Expected market return

3. Importance of Expected Return

Details: Expected return helps investors compare potential investments, build diversified portfolios, and assess whether an investment meets their financial goals.

4. Using the Calculator

Historical Method: Enter past annual returns as percentages separated by commas (e.g., "5, 8, -2, 12").
CAPM Method: Enter the risk-free rate, stock's beta, and expected market return.

5. Frequently Asked Questions (FAQ)

Q1: Which method is better?
A: Historical is simpler but assumes past performance continues. CAPM considers market risk but requires more inputs.

Q2: What's a good expected return?
A: This depends on your risk tolerance. Historically, stocks average 7-10% annually after inflation.

Q3: How many years of data should I use?
A: For historical average, 5-10 years is typical. More years may smooth out volatility but could include outdated data.

Q4: Where can I find beta values?
A: Financial websites like Yahoo Finance or Bloomberg provide beta values for publicly traded stocks.

Q5: Does this account for dividends?
A: Historical returns should include dividends. For CAPM, use total return (price appreciation + dividends) for market return.