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The expected return (or expected gain) on a financial investment is the expected value of its return (of the profit on the investment). It is a measure of the center of the distribution of the random variable that is the return. [1] It is calculated by using the following formula: [] = = where
An investment’s “expected return” is a critical number, but in theory it is fairly simple: It is the total amount of money you can expect to gain or lose on an investment with a predictable ...
The MPT is a mean-variance theory, and it compares the expected (mean) return of a portfolio with the standard deviation of the same portfolio. The image shows expected return on the vertical axis, and the standard deviation on the horizontal axis (volatility). Volatility is described by standard deviation and it serves as a measure of risk. [7]
The Capital Market Line says that the return from a portfolio is the risk-free rate plus risk premium. Risk premium is the product of the market price of risk and the quantity of risk, and the risk is the standard deviation of the portfolio. The CML equation is : R P = I RF + (R M – I RF)σ P /σ M. where, R P = expected return of portfolio
The rate of return on a portfolio can be calculated indirectly as the weighted average rate of return on the various assets within the portfolio. [3] The weights are proportional to the value of the assets within the portfolio, to take into account what portion of the portfolio each individual return represents in calculating the contribution of that asset to the return on the portfolio.
The Formula to Calculate Return on Investment (ROI) Return on investment is the ratio of the purchase price to the difference between the purchase price and the selling price. Even though it is a ...
When used within the context of the CAPM, beta becomes a measure of the appropriate expected rate of return. Due to the fact that the overall rate of return on the firm is weighted rate of return on its debt and its equity, the market-beta of the overall unlevered firm is the weighted average of the firm's debt beta (often close to 0) and its ...
Portfolio optimization is the process of selecting an optimal portfolio (asset distribution), out of a set of considered portfolios, according to some objective.The objective typically maximizes factors such as expected return, and minimizes costs like financial risk, resulting in a multi-objective optimization problem.