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Expected Rate of Return

   Also found in: Acronyms 0.01 sec.
expected rate of return
The rate of return expected on an asset or a portfolio. The expected rate of return on a single asset is equal to the sum of each possible rate of return multiplied by the respective probability of earning on each return. For example, if a security has a 20% probability of providing a 10% rate of return, a 50% probability of providing a 12% rate of return, and a 25% probability of providing a 14% rate of return, the expected rate of return is (.20)(10%) + (.50)(12%) + (.25)(14%), or 12%.

Expected Rate of 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 rate of return is calculated as:

Expected Rate of 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.


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Systematic risks are risks that cannot be diversified away and are compensated through risk premia (the expected rate of return above the risk-free interest rate).
In addition, the expected rate of return should not only meet but exceed your company objectives.
The expected rate of return on a single asset is equal to the sum of each possible rate of return multiplied by the respective probability of earning on each return.
 
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