Wize University Introduction to Finance Textbook > Risk, Return & Portfolio Theory
Expected Return and Ex-Ante Standard Deviation
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Expected Return
An expected return is the estimated future return on investment based on probabilities. It is found using the following formula:
Variance and Standard Deviation
The variance and standard deviations are used to quantify risk. The more a stock can deviate from its expected return, the less predictable (and riskier) it is.
Variance
Standard Deviation
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Example: Expected Return and Standard Deviation
Suppose you are given the following information for two stocks, A and B, where the return on each varies with the state of the economy.
Estimate the expected return and standard deviation for each stock.
Mark Yourself Question
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Practice: Expected Return and Standard Deviation
Compute the expected return and standard deviation for each of the following 2 stocks.
