Distinguish between Historical Return and Expected Return

Historical return and expected return are two important concepts in investment. Historical return is based on past performance, while expected return is an estimate of future performance.

Historical Return: Historical return is the actual return earned from an investment in the past. It is calculated using past market data and cannot be changed. It helps investors evaluate the past performance of an investment.

Expected Return: Expected return is the return an investor expects to earn in the future. It is an estimate based on different possible outcomes and their probabilities. It is commonly calculated using the following formula:

Expected Return (E(R)) = Σ [Probability × Possible Return]

Historical return is mainly used to analyze past investment performance, whereas expected return helps investors make future investment decisions.

In summary, historical return shows what has already happened, while expected return shows what an investor expects to happen in the future.

Investment Banking, Module: A, 98th BPE 1(a)