Expected Return

What Is Expected Return?

Expected return is the weighted average of all the outcomes an investment could produce, where each outcome is weighted by how likely it is to happen. It is a forecast, not a guarantee. Investors use it to compare opportunities and to judge whether a potential reward is large enough to justify the risk of holding an asset.

How Is It Calculated?

For a set of possible outcomes, expected return is found by multiplying each return by its probability and adding the results together:

Expected Return = (Return 1 × Probability 1) + (Return 2 × Probability 2) + ... + (Return n × Probability n)

The probabilities must add up to 100 percent. Analysts often estimate them from historical data, company fundamentals, or scenario analysis. Because the inputs are estimates, the result is only as reliable as the assumptions behind it.

A Simple Example

Suppose a stock has a 25 percent chance of rising 20 percent, a 50 percent chance of gaining 5 percent, and a 25 percent chance of falling 10 percent. The expected return is (0.25 × 20) + (0.50 × 5) + (0.25 × −10), which equals 5 + 2.5 − 2.5, or 5 percent. The stock will not necessarily return 5 percent in any single year, but over many similar situations the average outcome would be close to that figure.

Why It Matters to Investors

Expected return helps investors compare assets with different risk profiles. It is often paired with standard deviation, which measures how widely actual results may vary around the average. A higher expected return usually comes with higher uncertainty, and modern portfolio theory builds on this trade-off.

Expected return also has limits. Probability estimates can be wrong, and extreme events may be underweighted. Past averages do not ensure future results. Expected return is best understood as one input in a broader analysis, alongside risk tolerance, time horizon, and diversification.