Enter the return rate and probability of up to 5 previous years to determine the expected rate of return of an investment.

## 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 in 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 an 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 the probability of achieving those returns.