How to Calculate Expected Rate of Return of a Portfolio

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Portfolio Expected Rate of Return Calculator

Calculate the weighted average return of your investment portfolio

Expected Portfolio Return: 0.00%

Note: Your total weights do not equal 100%.

Understanding the Expected Rate of Return of a Portfolio

The Expected Rate of Return of a Portfolio is the weighted average of the expected returns of all the individual assets within that portfolio. For investors, this metric is critical because it helps predict potential future gains based on historical performance or forward-looking projections.

The Portfolio Return Formula

To calculate the expected return of a portfolio, you use the following mathematical formula:

E(Rp) = (w1 × r1) + (w2 × r2) + … + (wn × rn)

Where:

  • E(Rp): Expected Return of the Portfolio
  • w: The weight (percentage) of the total portfolio allocated to a specific asset
  • r: The expected return of that specific asset

Real-World Example Calculation

Imagine you have a portfolio with three assets:

Asset Weight Expected Return
Blue Chip Stocks 50% 10%
Government Bonds 40% 4%
Gold 10% 2%

Calculation:

(0.50 × 10%) + (0.40 × 4%) + (0.10 × 2%) = 5% + 1.6% + 0.2% = 6.8% Expected Return.

Why This Matters

Calculating the expected rate of return allows you to align your investment strategy with your financial goals. By adjusting the "weights" of your assets, you can see how shifts in diversification affect your potential bottom line. However, remember that "expected" does not mean "guaranteed"—actual market performance can deviate significantly due to volatility and systematic risks.

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