ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Finance: What is an Expected Return? 8 Views
Share It!
Description:
Reading the tarot cards. Sifting the tea leaves. Asking the crystal ball. Trying to predict the future performance of an investment is something that keeps hundreds of thousands of analysts around the world gainfully employed. For those who look to the past to attempt to forecast what is yet to come, one might look at the past five years’ returns and calculate an average. This would then be applied to a portfolio and weighted accordingly to allocation size, and calculated again for the overall portfolio. Again, the expected return is akin to an educated guess and obviously could not take into consideration deux ex machina events, such as natural disasters, war, a market crash, or other calamities.
- Social Studies / Finance
- Finance / Financial Responsibility
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
- Terms and Concepts / Banking
- Terms and Concepts / Bonds
- Terms and Concepts / Company Valuation
- Terms and Concepts / Entrepreneur
- Terms and Concepts / Financial Theory
- Terms and Concepts / Investing
- Terms and Concepts / IPO
- Terms and Concepts / Metrics
- Terms and Concepts / Stocks
- Terms and Concepts / Trading
- College and Career / Personal Finance
- Courses / Finance Concepts
Transcript
- 00:00
Finance, a la shmoop. what is expected return? Okay we've been experimenting for
- 00:08
months on libertarians with cancer in a gwangju prison. Our drug is gonna do one [ man swallows pill]
- 00:14
of three things. A. it may make the prisoners glow in the dark. Not all that
- 00:19
useful as a drug discovery but it would allow investors to sell the company to [man's face glows]
- 00:24
cirque de soleil who would be thrilled to cut down on bodypaint expenses. All
Full Transcript
- 00:29
right well if event A happens investors will get at least a 20% return on our [circus performers shown]
- 00:34
money odds of the the glow must go on happening ? 35% . okay moving on. Event B, our
- 00:41
drug may well just kill them - yeah that's a bunch of libertarians in a gwangju
- 00:46
prison. Who's gonna notice, right? in which case investors lose all of their money [money on fire]
- 00:50
and the glow must go on just folds up tent, and goes away. The return there
- 00:55
would be zero. Odds of this happening? Well, 60% yeah
- 00:59
six out of ten. Probably gonna die. okay event C the drug cures cancer! If that [written explanation shown]
- 01:03
happens while investors get a thousand percent return on their money .Save the
- 01:08
world and in general improve their tinder match ratio by like a zillion.
- 01:13
Odds of this happening, well just 5% but hey it's worth a shot right?
- 01:18
So our adjusted probability chart looks like- this - see we got return and odds and [chart shown]
- 01:24
expect the case 2035, 7 yeah there we go.
- 01:27
So what is all this telling us ? Well that the overall expected return - yeah you
- 01:32
knew we'd get there eventually - is a 57% return on our investment. Great return!
- 01:39
bottom line do it the chance of curing cancer would be well worth the risk. And [people dance]
- 01:44
if not well at least there would be fewer bicycling accidents.
Up Next
What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...
Related Videos
What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...
How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...
GED Social Studies 1.1 Civics and Government
