Expected Return

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What is 'Expected Return'

Expected return is the amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, if one invested in a stock that had a 50% chance of producing a 10% profit and a 50% chance of producing a 5% loss, the expected return would be 2.5% (0.5 * 0.1 + 0.5 * -0.05). It is important to note, however, that the expected return is usually based on historical data and is not guaranteed.

BREAKING DOWN 'Expected Return'

For the most part, the expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome - it is not a hard and fast figure of profit or loss. In the example above, for instance, the 2.5% expected return cannot, in fact, be realized - it is merely an average.

In addition to expected return, wise investors should also consider the probability of return in order to properly assess risk. After all, one can find instances in which certain lotteries offer a positive expected return, despite the very low probability of realizing that return.

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