The Expected Rate of Return Calculator helps investors estimate the average return they might earn from an investment over time, based on a variety of possible outcomes and their associated probabilities. This calculator is especially useful when evaluating risky investments, portfolio allocations, or comparing different investment options. It offers insight into the potential long-term return while factoring in both gains and losses. This way, investors can make better-informed decisions backed by a simple yet powerful financial concept.
formula of Expected Rate of Return Calculator
E[R] = (P₁ × R₁) + (P₂ × R₂) + … + (Pₙ × Rₙ)
Or written in summation form:
E[R] = Sum (Pᵢ × Rᵢ), for i = 1 to n
Where:
E[R] = Expected Rate of Return (as a decimal or percentage)
Pᵢ = Probability of the i-th outcome happening (value between 0 and 1)
Rᵢ = Return rate if the i-th outcome happens (in decimal form)
n = Number of all possible outcomes
Each term in the formula represents the likelihood of a particular return occurring, multiplied by that return. When summed together, these give you the average return you could expect if the same investment scenario played out many times.
Table of Common Investment Return Scenarios
| Investment Outcome Description | Probability (Pᵢ) | Return Rate (Rᵢ) |
|---|---|---|
| Best case scenario | 0.20 | 0.15 (15%) |
| Average case scenario | 0.50 | 0.07 (7%) |
| Worst case scenario | 0.30 | -0.05 (-5%) |
| Common Return Percentages | Decimal Value |
|---|---|
| 5% | 0.05 |
| 10% | 0.10 |
| 15% | 0.15 |
| -5% | -0.05 |
| Probability % | Decimal Format |
|---|---|
| 100% | 1.0 |
| 50% | 0.5 |
| 25% | 0.25 |
Example of Expected Rate of Return Calculator
Imagine you’re considering an investment with three possible outcomes:
- A 20% chance of earning a 15% return
- A 50% chance of earning a 7% return
- A 30% chance of losing 5%
To calculate the expected rate of return:
E[R] = (0.20 × 0.15) + (0.50 × 0.07) + (0.30 × -0.05)
E[R] = 0.03 + 0.035 – 0.015 = 0.05 or 5%
So, the expected rate of return for this investment is 5%. This means if you made this investment repeatedly, on average, you would earn a 5% return each time.
Most Common FAQs
It falls under financial planning and investment analysis tools.
No. It is an average outcome based on probability. Actual returns can vary widely in the short term.
Yes. It’s ideal for evaluating different options by comparing their expected returns side by side. This helps prioritize investments that offer a better balance between risk and reward.