Solution 28070: Calculating the Expected Value of a Return Using a BAII Plus™ Family Financial Calculator.
How do I calculate expected value of a return on the BAII Plus family financial calculators?
The example below will demonstrate how to calculate expected value of a return using the BAII Plus family financial calculators.Expected Value:
The weighted average of a probability distribution. Also known as the mean value.
Expected Return:
The return on an investment as estimated by an asset pricing model is calculated by taking the average of the probability distribution of all possible returns. For example, a model might state that an investment has a 10% chance of a 100% return and a 90% chance of a 50% return. The expected return is calculated as:
Expected Return = 0.1 (1) + 0.9 (0.5) = 0.55 = 55%.
On the calculator:
1) Press [1] [0] [%] [X] [1] [0] [0] [%] .
2) Press [=] [STO] [1].
3) Press [9] [0] [%] [X] [5] [0] [%].
4) Press [=] [STO] [2].
5) Press [RCL] [1] [+] [RCL] [2] [=].
The answer is .55 in decimal format or 55% in percentage format.
Please Note: It is important to note that there is no guarantee that the expected rate of return and the actual return will be the same.
Please see the BAII Plus family guidebooks for additional information.