Expected return
In one sentenceThe average of an investment's possible returns weighted by the probability of each, giving a single figure for comparing investments with uncertain outcomes.
Simply put
You set out several possible cases, each with its return and probability, then multiply and add. The probabilities must add up to 100%.
The expected return is not the return that will actually happen, but the average of what could happen. So always read it together with the size of the risk.
Worked example
An investor estimates three cases for an investment with hypothetical figures: strong growth with a 30% probability and a 20% return, a normal situation with a 50% probability and a 10% return, and a downturn with a 20% probability and a negative return of 5%.
Strong growth30% × 20% = 6%
Normal situation50% × 10% = 5%
Downturn20% × (−5%) = −1%
Expected return = 6% + 5% − 1%10%
Formula: Sum of (probability of each case × its return)