How to Calculate Expected Rate of Return

When investing, you often want to know how much money an investment is likely to earn. That’s where the expected rate of return comes in. Expected rate of return is calculated using the probabilities of investment returns for various potential outcomes. Investors can utilize the expected return formula to help project future returns.

Though it’s impossible to predict the future, having some idea of what to expect can be critical in setting benchmarks for a good return on investment.

What Is the Expected Rate of Return?

The expected rate of return, or expected return, is the profit or loss an investor expects from an investment given historical rates of return and the probability of certain returns under different scenarios. The expected return formula projects potential future returns.

Expected return is a speculative financial metric investors can use to determine where to invest their money. By calculating the expected rate of return of an investment, investors get an idea of how that investment may perform in the future.

This financial concept can be useful when there is a robust pool of historical data on the returns of a particular investment. Investors can use the historical data to determine the probability that an investment will perform similarly in the future.

However, it’s important to remember that past performance is far from a guarantee of future performance. Investors actively investing in stocks should be careful not to rely on expected returns alone when making investment decisions.

How to Calculate Expected Return

To calculate the expected rate of return of a stock or other security, you need to think about the different scenarios in which the asset could see a gain or loss. For each scenario, multiply that amount of gain or loss (return) by its probability. Finally, add up the numbers you get from each scenario.

The formula for expected rate of return is:

Expected Return = (R1 * P1) + (R2 * P2) + … + (Rn * Pn)

In this formula, R is the rate of return in a given scenario, P is the probability of that return, and n is the number of scenarios an investor may consider.

For example, say there is a 40% chance an investment will see a 20% return, a 50% chance that the investment will return 10%, and a 10% chance the investment will decline 10%. (Note: All the probabilities must add up to 100%.)

The expected return on this investment would be calculated using the formula above:

Expected Return = (.4 x 20%) + (.5 x 10%) + (.1 x -10%)

Expected Return = 8% + 5% – 1%

Expected Return = 12%

What Is Rate of Return?

The expected rate of return mentioned above looks at an investment’s potential profit and loss. In contrast, the rate of return looks at the past performance of an asset.

A rate of return is the percentage change in value of an investment from its initial cost. When calculating the rate of return, you look at the net gain or loss of an investment over a particular time period. The simple rate of return is also known as the return on investment (ROI).

Recommended: What Is the Average Stock Market Return?

How to Calculate Rate of Return

The formula to calculate the rate of return is:

Rate of return = [(Current value − Initial value) ÷ Initial Value ] × 100

Let’s say you own a share that started at $100 in value and rose to $110 in value. Now, you want to find its rate of return.

In our example, the calculation would be [($110 – $100) ÷ $100] x 100 = 10

A rate of return is typically expressed as a percentage of the investment’s initial cost. So, if you were to sell your share, this investment would have a 10% rate of return.

Recommended: What Is Considered a Good Return on Investment?

Different Ways to Calculate Expected Rate of Return

How to Calculate Expected Return Using Historical Data

To calculate the expected return of a single investment using historical data, you’ll want to average the rates of return over a span of certain years to determine the probability of those returns. The table below is an example.

Annual Returns of a Share of Company XYZ
Year	Return
2016	16%
2017	22%
2018	1%
2019	-4%
2020	8%
2021	-11%
2022	31%
2023	7%
2024	13%
2025	22%

For Company XYZ, previous returns have been broken down into three scenarios: above 10%, 0%-10%, and negative. The stock generated a 21% average rate of return in 5 of the 10 years (2016, 2017, 2022, 2024, and 2025), a 5% average return in 3 of the years (2018, 2020, 2023), and a -8% average return in 2 of the years (2019 and 2021).

Using this data, you may assume there is a 50% probability that the stock will have a 21% rate of return, a 30% probability of a 5% return, and a 20% probability of a -8% return.

The expected return on a share of Company XYZ would then be calculated as follows:

Expected return = (.5 x 21%) + (.3 x 5%) + (.2 x -8%)

Expected return = 10.5% + 1.5% – 1.6%

Expected return = 10.4%

Based on the historical data, the expected rate of return for this investment would be 10.4%.

However, when using historical data to determine expected returns, you may want to consider all of the data available or only data from a select period. The sample size of the historical data could skew the results of the expected rate of return on the investment.

How to Calculate Expected Return Based on Probable Returns

When using probable rates of return, you’ll need a percentage for the expected probability of a given outcome. This probability can be calculated, or you can make assumptions about the probability of a return. Remember, the probability column must add up to 100%. Here’s an example of how this would look.

Expected Rate of Return for a Stock of Company ABC
Scenario	Return	Probability	Outcome (Return * Probability)
1	14%	30%	4.2%
2	2%	10%	0.2%
3	22%	30%	6.6%
4	-18%	20%	-3.6%
5	-21%	10%	-2.1%
Total		100%	5.3%

Using the expected return formula above, in this hypothetical example, the expected rate of return is 5.3%.

Calculate Expected Rate of Return on a Stock in Excel

Follow these steps to calculate a stock’s expected rate of return in Excel (or another spreadsheet software):

1.    In the first row, enter column labels:

◦   A1: Investment

◦   B1: Gain A

◦   C1: Probability of Gain A

◦   D1: Gain B

◦   E1: Probability of Gain B

◦   F1: Expected rate of return

2.    In the second row, enter your investment name in B2, followed by its potential gains and the probability of each gain in columns C2-E2.

◦   Note that the probabilities in C2 and E2 must add up to 100%.

3.    In F2, enter the formula = (B2*C2)+(D2*E2).

4.    Press enter, and your expected rate of return should now be in F2.

If you’re working with more than two probabilities, extend your columns to include Gain C, Probability of Gain C, Gain D, Probability of Gain D, etc.

If there’s a possibility of loss, that would be a negative gain, represented as a negative number.

Limitations of the Expected Rate of Return Formula

Historical data can be a good starting place to understand how an investment behaves. That said, investors may want to be leery of extrapolating past returns for the future. Historical data is a guide, but it’s not necessarily predictive.

Another limitation of the expected returns formula is that it does not consider the risk involved in investing in a particular stock or other asset class. The risk involved in an investment is not represented by its expected rate of return.

In the historical return example using company XYZ above, 10.4% is the expected rate of return. What that number doesn’t reveal is the risk taken in order to achieve that rate of return. The investment experienced negative returns in the years 2019 and 2021. The variability of returns is often called volatility.

Standard Deviation

To understand the volatility of an investment, you may consider looking at its standard deviation. Standard deviation measures volatility by calculating a dataset’s dispersion (the range of values) relative to its mean. The larger the standard deviation, the bigger the range of returns.

Consider two different investments: Investment A has an average annual return of 10.3%, and Investment B has an average annual return of 6.2%. But when you look at the year-by-year performance, you’ll notice that Investment A experienced significantly more volatility. There are years when returns are much higher or lower than those of Investment B.

Year	Annual Return on Investment A	Annual Return on Investment B
2016	16%	8%
2017	22%	4%
2018	1%	3%
2019	-6%	0%
2020	8%	6%
2021	-11%	-2%
2022	31%	9%
2023	7%	5%
2024	13%	15%
2025	22%	14%
Average Annual Return	10.3%	6.2%
Standard Deviation	13.1%	5.5%

Investment A has a standard deviation of 13.1%, while Investment B has a standard deviation of 5.5%. Although Investment A has a higher rate of return, there is more risk. Investment B has a lower rate of return, but there is less risk. Investment B is not nearly as volatile as Investment A.

Recommended: A Guide to Historical Volatility

Systematic and Unsystematic Risk

All investments are subject to pressures in the market. These pressures, or sources of risk, can come from systematic and unsystematic factors. Systematic risk affects an entire investment type. Investors may struggle to reduce systematic risk through diversification within that asset class.

Because of systematic risk, you may consider building an investment strategy that includes different asset types. For example, a sweeping stock market crash could affect all or most stocks and is, therefore, a systematic risk. However, if your portfolio includes different types of bonds, commodities, and real estate, you may limit the impact of the equities crash.

In the stock market, unsystematic risk is specific to one company, country, or industry. For example, technology companies will face different risks than health care and energy companies. This type of risk may be reduced through portfolio diversification, spreading investments across companies, industries, or asset classes. While it may help reduce the impact of risks specific to an individual investment, it cannot prevent losses from broader market movements.

Expected Rate of Return vs Required Rate of Return

Expected return is just one financial metric that investors can use to make investment decisions. Similarly, investors may use the required rate of return (RRR) to determine the amount of money an investment needs to generate to be worth it for the investor. The required rate of return incorporates the risk of an investment.

What Is the Dividend Discount Model?

Investors may use the dividend capitalization model to determine an investment’s required rate of return. This model is best used for stocks with high dividends and steady growth. This calculation uses a stock’s price, dividend payment per share, and projected dividend growth rate to calculate the required rate of return.

The formula for the required rate of return using the dividend capitalization model is:

RRR = (expected dividend payment/share price) + projected dividend growth rate

So, if you have a stock that pays $2 in dividends per year and is worth $20, and the dividends are growing at 5% a year, you have a required rate of return of:

RRR = ($2 / $20) + .05

RRR = .10 + .05

RRR = .15, or 15%

What Is the Capital Asset Pricing Model?

Another way to calculate the required rate of return is to use a more complex model known as the capital asset pricing model.

In this model, the required rate of return is equal to the risk-free rate of return plus what’s known as beta (the stock’s volatility compared to the market) multiplied by the market rate of return minus the risk-free rate. For the risk-free rate, investors usually use the yield of a short-term U.S. Treasury.

The formula is:

RRR = Risk-free rate of return + Beta x (Market rate of return – Risk-free rate of return)

For example, let’s say an investment has a beta of 1.5, the market rate of return is 5%, and the risk-free rate is 1%. Using the formula, the required rate of return would be:

RRR = .01 + (1.5 x (.05 – .01))

RRR = .01 + (1.5 x (.04))

RRR = .01 + .06

RRR = .07, or 7%

---

---

The Takeaway

There’s no way to predict the future performance of an investment or portfolio. However, by looking at historical data and using the expected rate of return formula, investors can get a better sense of an investment’s potential profit or loss.

There’s also no guarantee that the actual performance of a stock, fund, or other asset will match the expected return. Nor does the expected rate of return consider the risk and volatility of assets. It’s just one factor an investor should consider when deciding on investments and building a portfolio.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Build your portfolio with SoFi Active Investing.

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

How do you find the expected rate of return?

An investment’s expected rate of return is the average rate of return that an investor can expect to receive over the life of the investment. Investors can calculate the expected return by multiplying the potential return of an investment by the chances of it occurring and then totaling the results.

How do you calculate the expected rate of return on a portfolio?

The expected rate of return of a portfolio is the weighted average of the expected rates of return of the individual assets in the portfolio. You first need to calculate the expected return for each investment, and then weigh those returns by how much of the portfolio each investment represents.

What is a good rate of return?

A good rate of return varies from person to person. Some investors may be satisfied with a lower rate of return if performance is consistent, while others may be more aggressive and aim for a higher rate of return despite volatility. Ultimately, it is up to the individual to decide what is considered a good rate of return.

---

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.

SOIN-Q126-119