What is 'Expected Return'
Expected return is the profit or loss an investor anticipates on an investment that has known or expected rates of return. It is calculated by multiplying potential outcomes by the chances of them occurring and then summing these results. For example, if an investment has a 50% chance of gaining 20% and a 50% change of losing 10%, the expected return is (50% * 20% + 50% * 10%), or 5%.
BREAKING DOWN 'Expected Return'
Expected return is a tool used to determine whether an investment has a positive or negative average net outcome. It's calculated as the expected value of an investment given its potential returns in different scenarios, as illustrated by the following formula:
Expected Return = SUM (Return_{i} * Probability_{i}), where i indicates each known return and its respective probability in the series.
Expected return is usually based on historical data and is therefore not guaranteed; it is merely a longterm weighted average of historical returns. In the example above, for instance, the 5% expected return may never be realized in the future, as the investment is inherently subject to systematic and unsystematic risks.
In addition to expected returns, wise investors should also consider the probability of return in order to better 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.
Expected Return of a Portfolio
The expected return doesn't just apply to single investments. It can also be expanded to analyze a portfolio containing many investments. If the expected return for each investment is known, the portfolio's overall expected return is a weighted average of the expected returns of its components. For example, assume the following portfolio of stocks:
 Stock A: $500,000 invested and an expected return of 15%
 Stock B: $200,000 invested and an expected return of 6%
 Stock C: $300,000 invested and an expected return of 9%
With a total portfolio value of $1,000,000, the weights of Stock A, B and C are 50%, 20% and 30%, respectively. Thus, the expected return of the total portfolio is:
Expected return of portfolio = (50% x 15%) + (20% x 6%) + (30% x 9%) = 7.5% + 1.2% + 2.7% = 11.4%
Limitations of the Expected Return
It is quite dangerous to make investment decisions based on expected returns alone. Before making any buying decisions, investors should always review the risk characteristics of investment opportunities to determine if the investments align with their portfolio goals. For example, assume two hypothetical investments exist. Their annual performance results for the last five years are:
 Investment A: 12%, 2%, 25%, 9%, 10%
 Investment B: 7%, 6%, 9%, 12%, 6%
Both of these investments have expected returns of exactly 8%. However, when analyzing the risk of each, as defined by the standard deviation, Investment A is approximately five times more risky than Investment B (Investment A has a standard deviation of 12.6% and Investment B has a standard deviation of 2.6%).
See Expected Return, Variance and Standard Deviation of aPortfolio for more on calculating and analyzing these statistical measures.

Total Return
Total return is a performance measure that reflects the actual ... 
Gross Rate of Return
Gross rate of return is the total rate of return on an investment ... 
MeanVariance Analysis
Meanvariance analysis is the process of weighing risk against ... 
NAV Return
The NAV return is the change in the net asset value of a mutual ... 
Downside Risk
Downside risk is an estimate of a security's potential to suffer ... 
Target Return
Target return is a pricing model that takes into account the ...

Financial Advisor
Measure Your Portfolio's Performance
Measuring the success of your investment solely on the portfolio return may leave you blindsided to risk. Learn how to evaluate your investment return. 
Investing
Is Apple's Stock Over Valued Or Undervalued?
Despite several drawbacks, the CAPM gives an overview of the level of return that investors should expect for bearing only systematic risk. Applying Apple, we get annual expected return of about ... 
Investing
Optimize your portfolio using normal distribution
Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk. 
Financial Advisor
Example of Applying Modern Portfolio Theory (MPS)
Modern Portfolio Theory: brush up on key mathematical framework used in investment portfolio construction. 
Investing
Returns and Financial Planning Projections
Return expectations continue to be a necessary part of any investment strategy discussion. 
Investing
5 ways to measure mutual fund risk
Statistical measures such as alpha and beta can help investors understand investment risk on mutual funds and how it relates to returns. 
Managing Wealth
3 Steps to Assess Your Portfolio's Annual Performance
Learn about three simple steps you can use to evaluate the annual performance of your investment portfolio, and why rate of return isn't enough. 
Trading
Improve your investing with Excel
Find out how to use Excel, a useful tool for assisting with investment organizations and evaluations. 
Investing
Understanding Volatility Measurements
Learn how to choose a fund with an optimal riskreward combination. Find more information about standard deviation, beta, and more.

What is the difference between the expected return and the standard deviation of ...
Learn about the expected return and standard deviation and the difference between the expected return and standard deviation ... Read Answer >> 
Use market risk premium for expected market return
Find out how the expected market return rate is determined when calculating market risk premium – and how to estimate investment ... Read Answer >> 
What is the difference between a sharpe ratio and an information ratio?
Understand the meaning of the Sharpe ratio and the information ratio, and understand how they differ as tools for evaluating ... Read Answer >>