Understanding Expected Rate of Return
The expected rate of return is a crucial metric for investors, representing the anticipated profit or loss on an investment over a specific period. It's a forward-looking estimate, not a guarantee of future performance.
How it's Calculated:
For a diversified portfolio, the expected rate of return is a weighted average of the expected returns of each individual asset within the portfolio. The weight of each asset is determined by its proportion of the total portfolio's value.
The formula is as follows:
E(Rp) = (w1 * E(R1)) + (w2 * E(R2)) + … + (wn * E(Rn))
Where:
- E(Rp) is the expected rate of return of the portfolio.
- w1, w2, …, wn are the weights (proportions) of each asset in the portfolio.
- E(R1), E(R2), …, E(Rn) are the expected rates of return for each individual asset.
Key Considerations:
- Expected Returns: These are estimates based on historical data, market analysis, and economic forecasts. They are subject to change.
- Asset Weights: Accurately determining the proportion of your portfolio allocated to each asset is vital for a correct calculation.
- Risk: Higher expected returns often come with higher risk. This calculator focuses solely on the expected return and does not inherently account for the risk associated with each asset.
- Diversification: A well-diversified portfolio, with assets that have different risk and return profiles, can help manage overall portfolio risk.
Example:
Let's consider a portfolio with two assets:
- Stock A: Weight = 40%, Expected Return = 10%
- Bond B: Weight = 60%, Expected Return = 5%
The expected rate of return for this portfolio would be:
(0.40 * 10%) + (0.60 * 5%) = 4% + 3% = 7%
function calculateExpectedReturn() {
var asset1Weight = parseFloat(document.getElementById("asset1Weight").value);
var asset1Return = parseFloat(document.getElementById("asset1Return").value);
var asset2Weight = parseFloat(document.getElementById("asset2Weight").value);
var asset2Return = parseFloat(document.getElementById("asset2Return").value);
var asset3Weight = parseFloat(document.getElementById("asset3Weight").value);
var asset3Return = parseFloat(document.getElementById("asset3Return").value);
var totalWeight = 0;
var weightedReturnSum = 0;
// Validate and process Asset 1
if (!isNaN(asset1Weight) && !isNaN(asset1Return) && asset1Weight >= 0 && asset1Return >= 0) {
weightedReturnSum += (asset1Weight / 100) * asset1Return;
totalWeight += asset1Weight;
}
// Validate and process Asset 2
if (!isNaN(asset2Weight) && !isNaN(asset2Return) && asset2Weight >= 0 && asset2Return >= 0) {
weightedReturnSum += (asset2Weight / 100) * asset2Return;
totalWeight += asset2Weight;
}
// Validate and process Asset 3 (if provided)
if (document.getElementById("asset3Name").value && !isNaN(asset3Weight) && !isNaN(asset3Return) && asset3Weight >= 0 && asset3Return >= 0) {
weightedReturnSum += (asset3Weight / 100) * asset3Return;
totalWeight += asset3Weight;
}
var resultElement = document.getElementById("result");
if (totalWeight === 0) {
resultElement.innerHTML = "";
} else {
// Check if total weight is close to 100% for a more accurate representation,
// but still calculate if weights don't add up exactly to 100%
if (Math.abs(totalWeight – 100) > 0.1 && totalWeight !== 0) { // Allow for small floating point inaccuracies
resultElement.innerHTML = "
Warning: Asset weights do not add up to 100%. The calculation is based on the provided weights.";
}
resultElement.innerHTML = "
Expected Portfolio Return: " + weightedReturnSum.toFixed(2) + "%
";
}
}
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