Expected Return

The expected return is the average of the possible returns, each weighted by its probability.

For example, if an investment has a 50% chance of earning a 5% return, a 25% chance of earning 10% and a 25% chance of losing 10%, then its expected return would be calculated as follows:

Expected Return = (0.5) (0.05) + (0.25) (0.1) + (0.25) (-0.1)

= .025 + .025 - .025

= 2.5%