Expected return is the weighted average of individual holding returns, based on historical data. It represents the most likely annual return, though actual results will vary.
Formula
E[Rₚ] = Σᵢ wᵢ × E[Rᵢ]Methodology
Expected return is a fundamental concept from Modern Portfolio Theory. For a portfolio, it's simply the weighted average of the expected returns of its constituent assets.
The calculation uses arithmetic annualization: we compute the average daily return and multiply by 252 (trading days per year). This method is standard for short-to-medium term projections.
For long-term projections, geometric annualization would be more conservative because it accounts for compounding effects. However, arithmetic returns are more commonly used in practice because they better represent the expected value of future wealth.
When historical data is unavailable or insufficient for a stock, we use a default expected return of 8%, which approximates long-term equity market averages.
How to Interpret
| Range | Label | Meaning |
|---|---|---|
| ≥ 12 | High Growth | High growth potential, typically with significant volatility |
| 8 to 12 | Strong | Strong returns typical of equity-heavy portfolios |
| 5 to 8 | Moderate | Moderate returns balancing growth and stability |
| 2 to 5 | Conservative | Conservative returns prioritizing capital preservation |
| < 2 | Very Low | Very low returns - consider if meeting your goals |
Data Source
Individual stock returns calculated from 10 years of historical price data using arithmetic annualization (daily mean × 252 trading days). Falls back to 8% for stocks without sufficient history.
Reference
Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7(1), 77-91
Limitations
Past performance does not guarantee future results. Expected returns are based on historical data and may not reflect future market conditions.
Related Metrics
Analyze Your Risk Metrics
Calculate Sharpe ratio, volatility, and expected return for your portfolio.
For Educational Purposes Only
This analysis is not investment advice. Results are based on simplified models using historical data. Past performance does not guarantee future results. All investments carry risk of loss. Consult a qualified financial advisor before making investment decisions.