2.3.2 Historic Returns and Expected Returns

Question 1

How do you calculate an expected return for investments?

Answer 1

Calculate a range of possible outcomes and then the average of these possible outcomes, taking this
as a guide to the expected return. This highly theoretical approach is mathematically simple, but does
require some initial qualitative analysis.

e.g.

Expected Return - % Probability - Weighted Probability
11% - 50% - 5.5%
10% - 30% - 3.0%
9% - 20% - 1.8%

The expected return is the weighted average probability, ie, the sum of 5.5% + 3.0% + 1.8% = 10.3%.

Weighted average probability is Expected return (say 11%) times probability (say 50%) equals weighted probability (e.g. 5.5%)