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Expected return definition

Beginners are often surprised (and confused) by the fact that scholars can't settle on one term for the concept of expected return.

Intermediate

Expected return is the return on an asset that is baked-in to market expectations at the present time. An active manager will compare expected return to forecast return when deciding whether an asset is cheap or expensive. This is typically derived by multiplying an asset's beta (see CAPM) by the expected return on the Market.

Synonyms: consensus return, implied return, equilibrium return


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Quiz

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A stock's beta matches the market and you expect the market to increase by 8%. The forecast for the stock is 9%. What is the stock's expected return. | 7% or 8% or 9%?

8%

In a Sentence

Pam:  The stock had a beta of 2, but then diversified. So that can't be a valid expected return .
Eve:  I agree, run it through the 3-factor model. Jeez, look at us, now we sound like quant geeks.

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Keywords:
expected return
consensus return
market expectations
CAPM
Capital Asset Pricing Model
Market
stock
investment
Modern Portfolio Theory
equilibrium return