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Expected Returns

by Survivor University

Published May 12, 2009 |

Expected return is calculated using an average of probability returns.

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Expected return is calculated using an average of probability returns.

This is why it is called "expected." We do not know for sure what the return will be, but what we know is:

If Portfolio A has a 40% chance of returning 30%, a 40% chance of returning 20% and a 20% chance that it will return 35%, then our expected return is calculated as follows:

0.4*0.3 + 0.4*0.2 + 0.2*0.35 = 0.12 + 0.07 +0.07 = 0.26 or 26%.

Our expected return for this portfolio is 26%.

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