expected rate of return

Also found in: Acronyms.

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.
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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%.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
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