Definition of 'Expected Return'
There are a number of factors that can affect the expected return on an investment, including the risk of the investment, the length of time the investment is held, and the expected rate of inflation. The risk of an investment is determined by the uncertainty of its future cash flows. The longer the investment is held, the more time there is for the value of the investment to change. The expected rate of inflation is the rate at which prices are expected to rise over time.
The expected return on an investment can be calculated using a number of different methods. One common method is the discounted cash flow (DCF) method. The DCF method involves calculating the present value of all of the expected future cash flows from the investment. The present value is calculated by discounting the future cash flows back to the present using an appropriate discount rate. The discount rate is a rate of return that reflects the risk of the investment.
The expected return on an investment is an important factor in investment decision-making. However, it is important to remember that the expected return is not a guarantee of future returns. The actual return on an investment can vary significantly from the expected return. This is due to a number of factors, including the risk of the investment, the length of time the investment is held, and the unexpected changes in economic conditions.
Despite the uncertainty of future returns, the expected return is a valuable tool for investment decision-making. It can help investors to compare different investments and to determine which ones are likely to provide the best returns.
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