A way to look at how well an investment has performed over a period of several years. As the name suggests, you just take the annual returns for a given period of time and figure out the average.
For instance, in the last half dozen years, the NASDAQ has returned +3% then -12%, then +22%, then +9%, then +15%, then -2%. The AVERAGE of these annual returns is about +5.8%. That's it. No calculus needed. Just a little addition and then a little division. You know, an average.
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Finance: What is an Expected Return?8 Views
Finance, a la shmoop. what is expected return? Okay we've been experimenting for
months on libertarians with cancer in a gwangju prison. Our drug is gonna do one [ man swallows pill]
of three things. A. it may make the prisoners glow in the dark. Not all that
useful as a drug discovery but it would allow investors to sell the company to [man's face glows]
cirque de soleil who would be thrilled to cut down on bodypaint expenses. All
right well if event A happens investors will get at least a 20% return on our [circus performers shown]
money odds of the the glow must go on happening ? 35% . okay moving on. Event B, our
drug may well just kill them - yeah that's a bunch of libertarians in a gwangju
prison. Who's gonna notice, right? in which case investors lose all of their money [money on fire]
and the glow must go on just folds up tent, and goes away. The return there
would be zero. Odds of this happening? Well, 60% yeah
six out of ten. Probably gonna die. okay event C the drug cures cancer! If that [written explanation shown]
happens while investors get a thousand percent return on their money .Save the
world and in general improve their tinder match ratio by like a zillion.
Odds of this happening, well just 5% but hey it's worth a shot right?
So our adjusted probability chart looks like- this - see we got return and odds and [chart shown]
expect the case 2035, 7 yeah there we go.
So what is all this telling us ? Well that the overall expected return - yeah you
knew we'd get there eventually - is a 57% return on our investment. Great return!
bottom line do it the chance of curing cancer would be well worth the risk. And [people dance]
if not well at least there would be fewer bicycling accidents.
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