Expected Return
What is expected return?
Expected return is the average gain (or loss) anticipated for a particular investment over a given time period. Also called the rate of return, this figure is often expressed as an annual percentage.
How is it determined?
One way to get an idea about how an investment might perform is to review its performance history. This method isn’t perfect (the past can’t reliably predict the future), but it’s a place to start. Another method is to look forward (instead of backward) by comparing the investment’s current price with its projected future profits or cash flows, and then do a bit of math to determine the implied rate of return. Yet another method is to take some benchmark rate, like the current level of interest rates on loans and other fixed income instruments (e.g., bonds) and then make adjustments up or down to this rate based on the characteristics of the investment under review. As a rule of thumb, the riskier an investment, the more you should demand from it in expected return.
How did you arrive at the default expected returns?
We use a variety of sources from academia to Wall Street to arrive at the default expected returns you see in the Dashboard, and we review our assumptions frequently. This is why you see the recommended values change from time to time.
One important take away here: nobody knows with certainty how any investment is going to perform over any time period, although some investments are certainly safer bets than others. We just do our best to give you what we believe are reasonable assumptions. In any event, you can always run the model using your own assumptions for expected return. You might know better than us, anyway. Have at it, boss.
