Learn calculate the expected rate of return on some of your investments.
When it comes to making financial investments, investors want to know how much money they will make off the principal they invested. That might seem like a tall order since many investors are at the mercy of the marketplace. However, by calculating the different possible outcomes of a given investment, you can derive an "expected rate of return." The math is fairly straightforward, and it will give you a window into the financial future of the investment in question.
Instructions
1. Understand the expected rate of return formula. Like many formulas, the expected rate of return formula requires a few "givens" in order to solve for the answer. The "givens" in this formula are the probability of different outcomes and what those outcomes will return. The formula is the following.
(Probability of Outcome x Rate of Outcome) + (Probability of Outcome x Rate of Outcome) = Expected Rate of Return
In the equation, the "Probability of Outcome" must add up to 100 percent. So if there are four possible outcomes, then the total of those probabilities must equal 100 percent.
2. Plug the numbers into the equation. For example, if an investment had a 30 percent chance of returning 20 percent profits, a 50 percent chance of returning 10 percent profits and a 20 percent chance of returning 5 percent. The equation would read:
(.30 x .20) + (.50 x .10) + (.20 x .05) = Expecte Rate of Return
3. Calculate each piece of the expected rate of return equation. The example would calculate as the following:
.06 + .10 + .01 = .17
In the equation, the expected rate of return is 17 percent.
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