Expected Return

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Expected return

The expected return on a risky asset, given a probability distribution for the possible rates of return. Expected return equals some risk-free rate (generally the prevailing U.S. Treasury note or bond rate) plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P 500 and the historic U.S. Treasury bond) multiplied by the asset's beta. The conditional expected return varies through time as a function of current market information.

Expected Return

The return on an investment as estimated by an asset pricing model. It is calculated by taking the average of the probability distribution of all possible returns. For example, a model might state that an investment has a 10% chance of a 100% return and a 90% chance of a 50% return. The expected return is calculated as:

Expected Return = 0.1(1) + 0.9(0.5) = 0.55 = 55%.

It is important to note that there is no guarantee that the expected rate of return and the actual return will be the same. See also: Abnormal return.

Expected Return

The expected return is used to figure the taxable portion of pension that is taxed under the general rule. For a lifetime pension, it is computed by multiplying the annual pension by the applicable expected life multiple from government actuarial tables.
References in periodicals archive ?
Even if we leave the interpolation problem aside, the usefulness of M2+ as a long-run indicator also would be limited: For the demand for M2+ to be properly specified, one would need to specify ex ante returns - a task bordering on the impossible, as the authors of both papers seem to acknowledge.
To specify the demand for M2+, they correctly recognize the importance of specifying the ex ante return on its close substitutes - real assets such as commodities and durable goods, as well as financial assets such as direct holdings of short-term instruments, bonds and stocks.
Joseph Hotz, and Arnaud Maurel, Duke University and NBER; and Teresa Romano, Duke University, "Recovering Ex Ante Returns and Preferences for Occupations Using Subjective Expectations Data"
The estimated demand functions posit direct holdings of Treasury bonds and bills as the sole substitutes for M2+ because of difficulties in finding plausible measures of expected ex ante returns on real assets and equities.
Proxies for ex ante returns on bond and stock funds are examined immediately below.
Proxies for Ex Ante Returns and their Effects on Changes in M2-Type Bond and Stock Funds