As a well-informed investor, you’ll innately want to know your investment expected return, its expected growth as well as the cumulative profit or loss it’s accruing. The expected return is based on traditional returns and used to develop estimates, but it is not a prediction.
How to Work Out Your Expected Return
The investor must determine the actual return of each of the instruments in their portfolio, as well as the total weight of each asset in the portfolio, to compute the portfolio’s expected value. As a result, the investor must add the weighted averages of each security’s expected rates of return (RoR).
An investor derives his or her estimates of a security’s predicted return on the premise that what has worked in the past will continue to work in the future. The investor does not calculate the projected return using a structural understanding of the market. Instead, they calculate the weight of each asset in the portfolio by dividing the overall value of the security by the value of each security.
Once an investor has determined the expected return of each security and the weight of each security, he or she simply multiplies the average value of each security by the weight of the same security and adds the product of each security.
Expected Return Limitations
Calculating a security’s predicted return is more guessing than certainty because the market is turbulent and uncertain. As a result, it may result in an error in the total portfolio’s predicted to return.
Expected returns don’t tell the whole story, therefore basing investment decisions only on them can be risky. Expected returns, for example, do not account for volatility. Year in and year out, securities that fluctuate between significant gains and losses can have the same predicted returns as those that stay in a lower range.
Expected returns do not take into account current market conditions, the political and economic climate, legal and regulatory changes, and other factors because they are backward-looking.