Expected return is the return that we can reasonably expect from our investment. The return on a financial instrument results from the arithmetic mean of the returns that are calculated after the observation period. Expected return expresses – based on past performance – the probability of a future return and therefore does not represent a guarantee for the future.
In statistics, this is referred to as central tendency, where the majority of the periodic returns converge and condense. This is the explanation for why the mean is also called the expected value. The higher the value, the more encouraging the situation for the investor, but this figure alone can’t support an investment decision, as the risk assessment is missing.
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