What is the expected return?
The expected return is the value that investors expect to make an asset on average or lose on average in a given period of time. More precisely, it is the sum of all possible financial results of the asset, which are weighed the probability of the result. If the asset is easily calculated using a tree diagram, the asset has a 70 % chance of earning 6 percent and a 30 % chance to earn 9 percent per year, then the expected return of the asset is calculated as 6.9 percent. Interest, dividends and capital gains and loss of assets affect their expected returns. It is also referred to as the average return, it is the best predictor of the future market behavior of the investor.
actual versus expected returns
In contrast to the expected return, the actual income is the reported amount that the asset acquired or lost in the given period. The total return is the actual return on assets over the investment horizon, including the reinvestment rate. It is very unlikely that the actual re assetsAoTification will be exactly the same as the expected yield, so if its actual and expected returns are close enough, the “on the current” is considered. If the asset has significantly insufficiently executive or overcome to the expected return, then it is called an unusual return that can occur due to merger, interest rate or lawsuits that all affect the specific assets instead of the market as a whole.
prediction methods
To find out and use unusual returns, investors rely on different methods to accurately predict the expected return of the asset. In addition to the aforementioned tree diagram, another simple method of taking over the historical average of past annual yields is another simple method of taking over the historical average of previous annual yields. The historical average is not a bad estimate if society has a long history, has accurate historical data and has made few changes in its structure, politicians and strategies. Nana the other side, the calculation did notIt edits volatility, which is a rate of change in investment prices from year to year, and is therefore more of a primitive estimate.
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Some economists have noticed that risk -free assets such as bonds have unexplained, lower, long -term total revenues than volatile assets such as stocks. As a result, risk -free assets may negatively affect the calculation of the expected return. Economists Edward C. Prescott and Rajnish Mehra called this "Equity Premium Puzzle" phenomenon that economists tried to understand. Equity Premium is an unnecessary yield that remains when the expected market return is deducted by a risk -free return of assets. Modern economic models, such as CAPM (CAPM) prices, are trying to solve property premium puzzles estimated by the expected return of risk -free assets differently from risk assets. The model focuses on the volatility of risk assets and their sensitivity to market changes.