# How to Calculate Expected Rate of Return

Investments are always made with an expectation of getting some return. Expected rate of return, which is an averaging of the possible outcomes of an investment, is an important concept in the field of finance.

Narayani Karthik

*"Price is what you pay. Value is what you get."*- Warren Buffett

The Concept

Formula

Expected rate of return (∑i) = 1

^{n}[P(i) x r_{i}]r

_{i}= rate of return

P(i) = probability of achieving the return (r

_{i})

n = number of probable outcomes anticipated

(25% x 15%) + (40% x 12%) + (35% x (-)5%) = 0.0375 + 0.048 + (-)0.0175 = 0.068

Here, 6.8% is the expected rate of return.

This calculation is an integral part of any business and for people who invest in securities.