Expected return
Also called: average expected return
The average return an investment would deliver if the same situation could be repeated many times, weighting each outcome by its chance.
An expected return is a probability-weighted average of the possible outcomes. It describes what an investment offers on average, not what will happen to you: any single investment produces one outcome, which can be far from the expected figure.
Investments with higher expected returns usually come with a wider range of possible outcomes, including losses.
Example
A 50% chance of +20% and a 50% chance of −5% gives an expected return of 0.5 × 20 + 0.5 × (−5) = 7.5%, though half the time you lose money.
Learn more in these lessons
- Risk, return, liquidity and time horizonWhy do higher returns come with higher risk?
- Probability and expected valueWhat is expected value, and why does it matter for investing?
- Investing compared with speculationWhat is the difference between investing and speculating?
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