1. What is the Expected Return Formula?

The Expected Return formula calculates the average return an investment is expected to generate based on different possible outcomes and their probabilities. It's a fundamental concept in probability and financial analysis.

2. How Does the Calculator Work?

The calculator uses the Expected Return formula:

Where:

• \( E[R] \) — Expected return
• \( p_i \) — Probability of outcome i (as decimal)
• \( r_i \) — Return of outcome i (as decimal)

Explanation: The formula sums the products of each possible return multiplied by its probability of occurrence.

3. Importance of Expected Return Calculation

Details: Expected return helps investors evaluate potential investments, compare different opportunities, and make informed decisions based on risk and return trade-offs.

4. Using the Calculator

Tips: Enter probabilities as decimals (e.g., 0.25 for 25%) separated by commas. Enter corresponding returns as decimals (e.g., 0.10 for 10%) in the same order.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between expected return and actual return?
A: Expected return is a statistical prediction, while actual return is what really occurs. Actual returns may differ due to unforeseen events.

Q2: How many outcomes can I include?
A: You can include as many outcomes as needed, but probabilities must sum to 1 (100%).

Q3: Can I use percentages instead of decimals?
A: The calculator expects decimals (e.g., 0.25 not 25%), but you could modify the input handling to accept percentages.

Q4: What if my probabilities don't sum to 1?
A: The calculation will still work mathematically, but it won't represent a proper probability distribution.

Q5: How is this different from weighted average?
A: Expected return is essentially a weighted average where the weights are probabilities summing to 1.