Expected Rate of Return on Investment Calculator

Expected Rate of Return Calculator

Calculate the weighted average return of your investment portfolio.

Asset Name (Optional)

Invested Capital ($)

Projected Return (%)

The Expected Rate of Return (ERR) is a key financial metric used by investors to estimate the profit or loss an investment portfolio is anticipated to generate. It is calculated as the weighted average of the probable returns of the individual assets within the portfolio. Unlike a guaranteed interest rate, the ERR is a statistical forecast based on historical data, asset allocation, and projected performance.

How the Formula Works

The core of the expected return calculation relies on weighting the return of each asset by its proportion to the total portfolio value. This provides a more accurate picture of performance than a simple average.

Formula:
E(R) = (w₁ × r₁) + (w₂ × r₂) + … + (wₙ × rₙ)

Where:

• E(R): Expected Rate of Return
• w: The weight of the asset (Asset Value / Total Portfolio Value)
• r: The projected return rate of that specific asset

Why Calculate Expected Return?

Calculating the ERR is fundamental to Modern Portfolio Theory (MPT). It allows investors to:

• Assess Feasibility: Determine if a portfolio can realistically meet future financial goals (e.g., retirement).
• Manage Risk: Balance high-risk, high-reward assets with stable, low-yield assets to achieve a desired average.
• Compare Portfolios: Objectively evaluate different asset allocation strategies.

Note that the "Expected" return is not a guarantee. It represents the mean outcome if the investment scenario were repeated many times. Actual returns will vary due to market volatility (Standard Deviation).

Real-World Example

Imagine an investor with a $100,000 portfolio split between three assets. Here is how the ERR is derived:

• Asset A (Stocks): $50,000 invested with a projected 10% return.
• Asset B (Bonds): $30,000 invested with a projected 4% return.
• Asset C (Cash): $20,000 invested with a projected 1% return.

Step 1: Calculate Weights
Stocks: 50%, Bonds: 30%, Cash: 20%.

Step 2: Calculate Weighted Returns
Stocks: 0.50 × 10% = 5.0%
Bonds: 0.30 × 4% = 1.2%
Cash: 0.20 × 1% = 0.2%

Total Expected Return: 5.0% + 1.2% + 0.2% = 6.4%.

Using our calculator above, you can input these exact figures to instantly see the weighted average return for any complexity of portfolio.