Calculate the probability-weighted average return of an investment based on different potential future scenarios.
Scenario
Probability (%)
Projected Return (%)
Note: Total Probability must equal 100%.
function calculateExpectedReturn() {
// Get values using var as requested, defaulting to 0 if empty or NaN
var p1 = parseFloat(document.getElementById('prob1').value) || 0;
var r1 = parseFloat(document.getElementById('ret1').value) || 0;
var p2 = parseFloat(document.getElementById('prob2').value) || 0;
var r2 = parseFloat(document.getElementById('ret2').value) || 0;
var p3 = parseFloat(document.getElementById('prob3').value) || 0;
var r3 = parseFloat(document.getElementById('ret3').value) || 0;
var resultBox = document.getElementById('errResult');
resultBox.style.display = 'block';
// Validate total probability
// Using a small epsilon for floating point comparison safety, though direct comparison usually works for integers entered
var totalProbability = p1 + p2 + p3;
if (Math.abs(totalProbability – 100) > 0.01) {
resultBox.innerHTML = "Error: The sum of all probabilities must equal exactly 100%. Current total: " + totalProbability.toFixed(2) + "%.";
resultBox.style.backgroundColor = "#f8d7da";
resultBox.style.borderColor = "#f5c6cb";
return;
}
// Calculate weighted returns (Probability decimal * Return)
var weightedR1 = (p1 / 100) * r1;
var weightedR2 = (p2 / 100) * r2;
var weightedR3 = (p3 / 100) * r3;
// Sum weighted returns
var expectedReturn = weightedR1 + weightedR2 + weightedR3;
resultBox.innerHTML = "Expected Rate of Return: " + expectedReturn.toFixed(2) + "%";
resultBox.style.backgroundColor = "#e2e3e5";
resultBox.style.borderColor = "#d6d8db";
}
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max-width: 650px;
margin: 20px auto;
padding: 20px;
border: 1px solid #eee;
border-radius: 8px;
background-color: #f9f9f9;
font-family: sans-serif;
}
.err-calc-box {
background: #fff;
padding: 20px;
border-radius: 8px;
box-shadow: 0 2px 5px rgba(0,0,0,0.1);
}
.scenario-row {
display: flex;
flex-wrap: wrap;
margin-bottom: 15px;
align-items: center;
border-bottom: 1px solid #eee;
padding-bottom: 10px;
}
.header-row {
font-weight: bold;
border-bottom: 2px solid #ddd;
padding-bottom: 5px;
margin-bottom: 10px;
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.col-input {
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color: #333;
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.err-calc-box input[type="number"] {
width: 100%;
padding: 8px;
border: 1px solid #ccc;
border-radius: 4px;
box-sizing: border-box; /* Important for padding/width */
}
.err-controls {
text-align: center;
margin-top: 20px;
}
.err-controls small {
display: block;
margin-bottom: 10px;
color: #666;
}
.err-controls button {
background-color: #0073aa;
color: white;
border: none;
padding: 12px 24px;
font-size: 16px;
border-radius: 4px;
cursor: pointer;
transition: background-color 0.3s;
}
.err-controls button:hover {
background-color: #005177;
}
.err-result-box {
margin-top: 20px;
padding: 15px;
background-color: #e2e3e5;
border: 1px solid #d6d8db;
border-radius: 4px;
text-align: center;
font-size: 18px;
color: #383d41;
}
Understanding Expected Rate of Return
The Expected Rate of Return (E[R]) is a crucial concept in finance and investment analysis. It does not guarantee what an investment will yield; rather, it represents the probability-weighted average of all possible outcomes. It helps investors assess the potential reward of an asset relative to its risk.
By estimating different future market scenarios, assigning a probability to each, and projecting a return for each scenario, an investor can calculate a single percentage figure that summarizes the "average" expectation.
The Formula
The calculation involves multiplying potential outcomes by their chances of occurring and summing the results. The formula used by the calculator above is:
E[R] = (P1 × R1) + (P2 × R2) + … + (Pn × Rn)
E[R]: Expected Return
Pi: The probability of scenario i occurring (expressed as a decimal, e.g., 30% = 0.30).
Ri: The anticipated return rate in scenario i.
How to Use This Calculator
To use the Expected Rate of Return calculator, you need to define varying scenarios for your investment. We have provided three slots, typically used for "Best Case," "Base Case" (most likely), and "Worst Case."
Enter Probabilities: Assign a percentage likelihood to each scenario. Crucial: The total of all probabilities must equal exactly 100%.
Enter Projected Returns: For each scenario, enter the percentage return you anticipate. Use positive numbers for gains and negative numbers for losses (e.g., enter -10 for a 10% loss).
Calculate: Click the button to see the weighted expected return.
Example Calculation
Imagine you are analyzing a stock. You believe there are three distinct possibilities for the next year:
Scenario 1 (Bull Market): There is a 30% chance the market booms, and the stock returns 25%.
Scenario 2 (Normal Market): There is a 50% chance the market is average, and the stock returns 8%.
Scenario 3 (Bear Market): There is a 20% chance the market tanks, and the stock loses 15% (-15%).