Weighted Average of Possible Returns

B

The weighted average of possible returns, with the weights being the probabilities of occurrence, is referred to as the expected return.

In finance and investments, expected return is a measure of the average return an investor can expect to receive from an investment, given its various possible outcomes and the probabilities of those outcomes occurring. It is calculated by taking the sum of each possible return multiplied by its respective probability of occurrence.

For example, let's say you are considering investing in a stock that has three possible outcomes: a 20% return with a probability of 40%, a 10% return with a probability of 30%, and a -5% return with a probability of 30%. The expected return for this investment would be:

Expected Return = (0.20 x 0.40) + (0.10 x 0.30) + (-0.05 x 0.30) = 0.08 or 8%

This means that, on average, you can expect to earn an 8% return on your investment in this stock.

Option A, probability distribution, refers to the set of all possible outcomes and their associated probabilities. Option C, standard deviation, is a measure of the degree of variation of a set of returns from its average. Option D, coefficient of variation, is a relative measure of the standard deviation, often used to compare the risk of different investments with different expected returns.