Expected Return

Expected return is a financial metric that estimates the average return an investor can anticipate from an investment over a given period, based on probabilities of different outcomes. It is calculated by multiplying the potential returns of an investment by their respective probabilities and summing the results. Expected return helps investors evaluate the attractiveness of an investment by providing an estimate of future performance, considering various market scenarios. While expected return provides valuable insights, it is not a guarantee of actual returns, as it does not account for the variability or risks associated with the investment.

Example

An investor calculates the expected return of a stock by considering different market conditions, such as bull, bear, and stable markets, and their respective probabilities.