The Expected Return is the profit or loss that an investor anticipates on an investment that has known historical rates of return. In other words, it’s the rate at which an investor expects to make money on an investment that has previously produced money. The expected rate of return is computed by determining the probability-weighted average rate of return on an investment’s historical performance data over a period of time.Known historical rates of return are used to calculate expected returns. Calculating the expected return requires determining the probability-weighted average rate of return on an investment’s historical performance data over a period of time. To determine the expected rate of return, you must know three things: the initial amount invested, the historical profits or losses, and their respective probabilities. While calculating expected returns is an approximation, it provides useful information for financial decisions.To determine the probability-weighted average rate of return on investment performance data, you must first calculate the expectancy and volatility. Expectedancy is calculated by multiplying expectancy, also called theoretical probability, times its theoretical weight factor. Expectedancy equals theoretical probability multiplied by expectancy factor. Volatility is calculated by multiplying standard deviation by historical profits or losses. Standard deviation is a measure of deviation from average where historical rates of profit or loss are known. Historical rates of profit or loss determine whether deviations from average will produce higher or lower rates of profit or loss than average. Determining these mathematical expressions requires reliable data about historical rates of profit or loss—which can be easily accessed by investors themselves using performance reports from previous investments.
