It is a wise move to calculate the expected return of every investment, preferably before venturing into it, this is more like a feasibility study carried out to determine if the investment is worthwhile or not. The focus of this article will be on what is and how to calculate the expected rate of return of an investment.
WHAT IS EXPECTED RATE OF RETURN OF AN INVESTMENT?
Expected return of an investment is defines as how much gain or losses anticipated of an investment that has various known or expected rates of return. Every investment usually experience losses as well as profits. Calculating the expected rate of return of an investment is a way of finding out if there will be more losses than there will be profits. As was mentioned earlier, the calculation of expected rate of return of an investment will not be possible without the various known or expected rates of return. In other words, if the various expected rates of return are not known, calculating the expected return of an investment will be a difficult task.
WHAT IS RATE OF RETURN?
Rate of return is pretty much the same as the expected return of an investment. It is the percentage of how much profit or loss raised from an investment over a specified period of time, with regards to the investment cost. Now, if the rate of return must be known before one can calculate the expected return on an investment, it means that the investment must have been actively functional for some while. That is the only way one can have a record of profits and losses made with regards to a particular period of time.
HOW TO CALCULATE THE EXPECTED RETURN OF AN INVESTMENT
To calculate the expected return of an investment, multiply the potential outcomes by the chances of them occurring, and then sum up the results. After an investment has been up and running for a while, one can authoritatively state the potential outcomes of the investment within a specified period of time. With that one can easily provide the data necessary for calculating the expected rate of return of an investment.
Here is a little bit of illustration on how to calculate the expected return on an investment. If an investment has a 65% chance of gaining 25% within a specified period of time, and a 45% cane of losing 15%, the expected return on that investment is calculated as follows
For the chances of gaining, we have
65% X 25% = 1625
For the chances of losing, we have
45% X -15% = -675
The summing up the results, we have
1625 + -675 = 950 or 9.5%
That is it about calculating the expected return of an investment.
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