Expected Returns

Business, Legal & Accounting Glossary

Definition: Expected Returns

What is the dictionary definition of Expected Returns?

Dictionary Definition

The expected return is the weighted-average most likely outcome in gambling, probability theory, economics or finance.

Full Definition of Expected Returns

Expected returns are an estimation of a particular investment’s value. This estimation includes the payment of dividends if any and price changes. Expected returns are computed from a probability distribution curve encompassing all probable rates of return. If a specific asset is considered risky, the risk-free rate of return plus risk premium is termed the expected return.

Liquidity Trap

A liquidity trap is a financial position where cash holdings of banks are increasing and banks cannot find enough qualified borrowers even at abnormally low interest rates. Liquidity traps occur when there is dim economic prospects and investors do not invest. Companies do not borrow when bad economic conditions exist. A liquidity trap generally heralds the beginning of a recession. Companies and individuals do not spend and hoard their cash-thus fueling an economic downturn.

Capital Investment Factors

It is described as elements comprising a capital investment decision. List of capital investment factors includes the approximate cost of a project, life of the investment, expected returns from investment, serialized costs, rates of taxation, rates of interest, competitive regulatory and economic environment, and capital allowances.

Cost Justification

It is an explanation of the requirement of expenditure. Cost justification is backed up by documentation so that expected costs are lower than expected returns.

Risk Premium

It is a deviation between the risk-free rate of return and rate of return. Risk premiums can be calculated for specific security, a group of securities and even for a market.

Arbitrage Pricing Theory (APT)

It is a valuation model. Arbitrage pricing theory assumes that a security price is dependent on a number of factors. The factors themselves can be divided into two types: country-specific factors and macro factors.

Arbitrage pricing theory is not dependent on appraising market performance. It directly correlates security price to the factors responsible for the price. The list of factors includes interest rates and economic growth. Other factors are unique to specific sectors – for example, consumer spending forms an important factor for retailing businesses.

Discrete Scenarios

In gambling and probability theory, there is usually a discrete set of possible outcomes. In this case, the expected return is a measure of the relative balance of win or loss weighted by their chances of occurring.

For example, if a fair die is thrown and numbers 1 and 2 win ¤1, but 3-6 lose ¤0.5, then the expected gain per throw is

¤1 × 1/3 – ¤0.5 × 2/3 = ¤0:
the game is thus fair.

Continuous Scenarios

In economics and finance, it is more likely that the set of possible outcomes is continuous (a numerical or currency value between 0 and infinity). In this case, simplifying assumptions are made about the distribution of possible outcomes. Either a continuous probability function is constructed, or a discrete probability distribution is assumed

Cite Term

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Page URL
Modern Language Association (MLA):
Expected Returns. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. September 24, 2021 https://payrollheaven.com/define/expected-returns/.
Chicago Manual of Style (CMS):
Expected Returns. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/expected-returns/ (accessed: September 24, 2021).
American Psychological Association (APA):
Expected Returns. PayrollHeaven.com. Retrieved September 24, 2021, from PayrollHeaven.com website: https://payrollheaven.com/define/expected-returns/

Definition Sources

Definitions for Expected Returns are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 23rd April, 2020 | 1 Views.