Expected Return Calculator
Calculate Expected Return, Variance, Standard Deviation, Covariance, and Correlation Coefficient for asset returns with our powerful calculator.
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Related Calculators: Compound Calculator, Present Value, Internal Rate of Return (IRR), Sharpe Ratio, Relative Standard Deviation
How to Calculate Expected Return
Expected return is a key metric in investment analysis, providing an estimate of the average gain or loss an investor can anticipate from an investment over time. The calculation often involves the use of the Capital Asset Pricing Model (CAPM). Here's a step-by-step guide on how to calculate expected return:
- Two-Asset Portfolio: Expected return = (Return A x Probability A) + (Return B x Probability B)
- Identify the Risk-Free Rate: Determine the risk-free rate, usually represented by the yield on government bonds. This rate reflects the return on a completely risk-free investment.
- Estimate the Market Risk Premium: Assess the market risk premium, which represents the excess return expected from the overall market compared to the risk-free rate. It accounts for the inherent risk associated with investing in the broader market.
- Calculate Beta: Determine the beta of the investment. Beta measures the asset's volatility compared to the market. A beta of 1 indicates the same level of volatility as the market, while a beta greater than 1 implies higher volatility, and a beta less than 1 suggests lower volatility.
- Use the CAPM Formula: Apply the CAPM formula to calculate the expected return:
Expected Return = Risk-Free Rate + (Beta * Market Risk Premium)
- Adjust for Specific Risks: Consider any additional risks specific to the investment that may not be captured by the beta. Adjust the expected return accordingly to account for these unique factors.
It's important to note that expected return calculations are based on certain assumptions and historical data. Actual returns may vary, and investors should regularly reassess their expectations in light of changing market conditions.
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