| Expected Return | |
 The average of a probability distribution of possible returns, calculated by using the following formula:  |
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 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%: = (0.5) (0.1) + (0.25) (0.2) + (0.25) (-0.1) = 0.075 = 7.5% Although this is what you expect the return to be, there is no guarantee that it will be the actual return. |
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 Projected Returns: Honing The Craft - We look at how to forecast long-term returns on the three major asset classes. Financial Concepts - Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear. What's the difference between absolute and relative return? What is the difference between stated annual return and effective annual return? |
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