Enter the return rate and probability of up to 5 previous years to determine the expected rate of return of an investment.
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Expected Rate of Return Formula
The following formula is used to calculate the expected rate of return of an asset.
ER = Sum ( Ri * Pi)
- Where ER is the expected rate of return
- Ri is the returns of each consecutive year
- Pi is the probability of those returns occurring on any given year.
Expected Rate of Return Definition
An expected rate of return is a percentage return on an asset any investor predicts will happen on average. That is if an investor buys a stock, they expect to see a certain return the next year on average. What the actual return is my vary, but on average it should be close to the expected rate of return.
Expected Rate of Return Example
The expected rate of return is calculated using the formula above. In short, it’s the sum of the average return rate and their probabilities over a given number of years. For example, let’s say there are 2 years we are analyzing. One year it returns 5%, at a 75% probability, and the next it earns 6% at a 80% probability. The expected return rate would be 5%*35% + 6% * 25% = .0325 = 3.25%.
FAQ
What is an expected rate of return?
An expected rate of return is a measure of the expected return rate of an investment given a set of yearly returns and probability of achieving those returns.
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