1. What Is Expected Return?

The expected return is the weighted average of all possible returns on an investment, where the weights represent the probabilities of each outcome. It's a fundamental concept in portfolio theory and investment analysis.

2. How Does The Calculator Work?

The calculator uses the expected return formula:

Where:

• \( E[R] \) — Expected return
• \( w_i \) — Weight of the ith asset in the portfolio
• \( r_i \) — Return of the ith asset
• \( n \) — Number of assets

Explanation: The formula calculates the mean (average) return you would expect from an investment based on historical data or probability estimates.

3. Importance Of Expected Return

Details: Expected return helps investors make informed decisions by quantifying potential rewards. It's used in portfolio optimization, risk assessment, and comparing investment opportunities.

4. Using The Calculator

Tips: Enter weights and corresponding returns as comma-separated values. Weights don't need to sum to 1 (they'll be normalized). Example: "0.5,0.3,0.2" and "8,12,5" for weights and returns respectively.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between expected return and actual return?
A: Expected return is a forecast based on probabilities, while actual return is what really occurs. They often differ due to unforeseen market conditions.

Q2: How many decimal places should I use?
A: Two decimal places are typically sufficient for most investment analysis purposes.

Q3: Can I use percentages for returns?
A: Yes, the calculator works with both decimal (0.08) and percentage (8) formats.

Q4: What if my weights don't sum to 1?
A: The calculator automatically normalizes weights to sum to 1, so you can enter raw values like 50,30,20.

Q5: How is this different from CAPM?
A: This calculates portfolio return, while CAPM estimates expected return for an individual asset based on its systematic risk.