How to Calculate Your Expected Rate of Return

The expected rate of return is a measure of the efficiency of your investment portfolio. It represents the average expected return of an investment portfolio based on the expected returns of the individual investments that make it up.

Calculating your expected rate of return is important because it allows you to evaluate whether your portfolio is generating the expected return based on the level of risk you are willing to take on. If the expected rate of return is too low compared to the level of risk you are willing to take on, you may need to modify your portfolio to increase the expected return.

How to calculate the expected rate of return

To calculate the expected rate of return of your portfolio, you need to follow these steps:

• Determine the expected returns of each investment in the portfolio.
• Calculate the weight of each investment in the portfolio, i.e. its ownership share compared to the total of the portfolio.
• Multiply the expected return of each investment by its weight in the portfolio.
• Sum the results obtained in the previous step to obtain the expected rate of return of the portfolio.

Here is an example of how to calculate the expected rate of return using these steps:

Let’s assume we have a portfolio composed of three investments, A, B, and C, with the following expected returns and weights:

To calculate the expected rate of return of our portfolio, we therefore need to follow these steps:

1. Multiply the expected return of each investment by its weight in the portfolio:

• Investment A: 10% * 0.4 = 4%
• Investment B: 15% * 0.3 = 4.5%
• Investment C: 20% * 0.3 = 6%

2. Sum the results obtained: 4% + 4.5% +6% = 14.5%

The expected rate of return of our portfolio is therefore 14.5%.

Final considerations

Calculating your expected rate of return is an effective way to evaluate the efficiency of your investment portfolio and to check whether it is generating the expected return based on the level of risk you are willing to take on. However, keep in mind that the expected rate of return is only an estimate and that actual returns may differ from expectations. It is therefore important to constantly monitor your portfolio and make any necessary modifications.