The expected return (or expected gain) is the expected value of a random variable usually representing a gain, i.e. the weighted-average outcome in gambling, probability theory, economics or finance.
It is calculated by using the following formula:
- E(R) = Sum: probability (in scenario i) × the return (in scenario i) .
How do you calculate the average of a probability distribution? As denoted by the above formula, simply take the probability of each possible return outcome and multiply it by the return outcome itself. For example, if you knew a given investment had a 50% chance of earning a 10 return, a 25% chance of earning 20 and a 25% chance of earning -10, the expected return would be equal to 7.5:
- E(R) = 0.5 × 10 + 0.25 × 20 + 0.25 × (-10) = 7.5 .
Although this is what you expect the return to be, there is no guarantee that it will be the actual return.
Read more about Expected Return: Discrete Scenarios, Continuous Scenarios, Alternate Definition
Famous quotes containing the words expected and/or return:
“[My father] was a lazy man. It was the days of independent incomes, and if you had an independent income you didn’t work. You weren’t expected to. I strongly suspect that my father would not have been particularly good at working anyway. He left our house in Torquay every morning and went to his club. He returned, in a cab, for lunch, and in the afternoon went back to the club, played whist all afternoon, and returned to the house in time to dress for dinner.”
—Agatha Christie (1891–1976)
“Yet I shall never return to the past, that attic.”
—John Ashbery (b. 1927)