- expected rate of return
__Fin__the projected percentage return on an investment, based on the weighted probability of all possible rates of return.*Abbr.**ERR*__EXAMPLE__It is calculated by the following formula:**E[r]= ΣsP(s)rs**where E[r] is the expected return, P(s) is the probability that the rate rs occurs, and rs is the return at s level.The following example illustrates the principle which the formula expresses.The current price of ABC Inc. stock is trading at $10. At the end of the year, ABC shares are projected to be traded:25% higher if economic growth exceeds expectations—a probability of 30%;12% higher if economic growth equals expectations—a probability of 50%;5% lower if economic growth falls short of expectations—a probability of 20%.To find the expected rate of return, simply multiply the percentages by their respective probabilities and add the results:**(30% × 25%) + (50% × 12%) + (25% × –5%) = 7.5 + 6 + –1.25 = 12.25% ERR**A second example:if economic growth remains robust (a 20% probability), investments will return 25%;if economic growth ebbs, but still performs adequately (a 40% probability), investments will return 15%;if economic growth slows significantly (a 30% probability), investments will return 5%;if the economy declines outright (a 10% probability), investments will return 0%.Therefore:**(20% × 25%) + (40% × 15%) + (30% × 5%) + (10% × 0%) = 5% + 6% + 1.5% + 0% = 12.5% ERR.***See also*capital asset pricing model

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