Question

how do i find expected rate of return?

Answer 1

Expected rate of return is calculated as (Projection over or below RFR * Probability of scenario)_all\[ER=\sum_{i=1}^{n} (r _{i}*P _{i})\]
where:
\[r _{i}=projected return above or below RFR\]
P= the probability of the above scenario


Ex. If the market projection for a stock say 12% with a probability of .3, 14% with a probability of .6 & 16% with probability of .1

then ER = 12%*.3+14%*.6+16%*.1=14%


This is then compared with the required rate of return RR to decide upon investments.