Expected Rate of Return Calculator

To calculate the expected rate of return, multiply each possible return by its probability and then sum the results.

The Expected Rate of Return (ERR) Calculator is ideally suited to estimate the potential returns on an investment based on its probability of various outcomes. The expected rate of return is an essential concept in finance, helping investors evaluate the profitability and risks associated with different investment options. By factoring in the probability of each potential return, investors can make more informed decisions, balancing expected gains with the risk of loss.

Formula

$ER = \sum(R_i \times P_i)$

Variable	Description
ER	Expected rate of return
$R_i$	Rate of return for a specific outcome
$P_i$	Probability of the outcome occurring

Solved Calculations

Example 1:
For example, if there are two possible outcomes for an investment, with a return of 10% having a probability of 0.4, and a return of 5% having a probability of 0.6, the expected rate of return (ER) is calculated as:

Step	Calculation
Rate of Return (R1)	10%
Probability (P1)	0.4
Rate of Return (R2)	5%
Probability (P2)	0.6
Result	$ER = (0.1 \times 0.4) + (0.05 \times 0.6) = 0.04 + 0.03 = 0.07$

Step	Calculation
Rate of Return (R1)	20%
Probability (P1)	0.5
Rate of Return (R2)	-5%
Probability (P2)	0.5
Result	$ER = (0.2 \times 0.5) + (-0.05 \times 0.5) = 0.1 – 0.025 = 0.075$

What is the Expected Rate of Return Calculator?

The Expected Rate of Return Calculator is a financial tool. It can calculate the potential return on an investment, taking into account different probabilities for various outcomes.

This calculation helps investors make informed decisions by estimating how much return they can expect from a particular investment, such as stocks, bonds, or mutual funds, over a specific period.

To use this calculator, input the expected returns for each possible outcome and their associated probabilities. The calculator will then calculate the weighted average of these returns, providing the expected rate of return. This value is vital for comparing different investment options and assessing risk versus reward.

Final Words:

In conclusion, the Expected Rate of Return Calculator is a useful tool for investors looking to evaluate potential investment outcomes. By estimating the return on investments with varying probabilities, it provides clarity and aids in making more confident, data-driven financial decisions.

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