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 classic literature ?
But his spirits were soon rising again, and with laughing eyes, after mentioning the expected return of the Campbells, he named the name of Dixon.
And therefore, when all Paris was rejoicing in the expected return of the king, appointed for the next day, Gondy alone, in the midst of the general happiness, was dissatisfied; he sent for the two men whom he was wont to summon when in especially bad humor.
Spenlow remarked, on this occasion, when we concluded our business, that he should have been happy to have seen me at his house at Norwood to celebrate our becoming connected, but for his domestic arrangements being in some disorder, on account of the expected return of his daughter from finishing her education at Paris.
Anyone who goes through the trouble of putting together a variance and covariance matrix and estimating expected returns is probably averse "to going with her gut" when selecting among those efficient possibilities.
Haugen Systems has been licensing expected returns for the US, Europe and Japan since that time.
While this investment has an outstanding return, new industries have high risk and their stocks are likely to have high expected returns.
An Index score below 50 indicates there are more markets categorised as cold (unattractive to investors as expected returns are below risk-adjusted required returns) than hot (attractive to investors as expected returns exceed risk-adjusted required returns).
The study provides the first comprehensive analysis of the effects of liquidity and information risks on expected returns of U.
The classical Modigliani-Miller and Harris-Pringle WACC formulas for specific debt policies are then derived from the general formula after having determined the corresponding tax shield expected returns.
By effectively integrating risk management with the strategy-setting process, management is able to sharpen the focus on improving expected returns, or alternatively holding the expected returns constant and favorably altering the organization's risk characteristics.
Second, realized returns may be poor estimates of expected returns if information surprises do not cancel out over the period of study (Froot and Frankel, 1989 and Elton, 1999).
What is the pattern by which expected returns vary over time and across assets?

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