Question

what is the market's overall expected rate of return

Answer 1

The expected return refers to the amount of money an investor expects to make on an investment given the investment's historical return or probable rates of return under different scenarios.The expected rate of return is a percentage return expected to be earned by an investor during a set period of time, for example, year, quarter, or month. In other words, it is a percentage by which the value of investments is expected to exceed its initial value after a specific period of time. The expected rate of return can be calculated either as a weighted average of all possible outcomes or using historical data of investment performance.In the short term, the return on an investment can be considered a random variable that can take any values within a given range. The expected return is based on historical data, which may or may not provide reliable forecasting of future returns. Hence, the outcome is not guaranteed. Expected return is simply a measure of probabilities intended to show the likelihood that a given investment will generate a positive return, and what the likely return will be.The purpose of calculating the expected return on an investment is to provide an investor with an idea of probable profit vs risk. This gives the investor a basis for comparison with the risk-free rate of return.A market portfolio is a theoretical bundle of investments that includes every type of asset available in the investment universe, with each asset weighted in proportion to its total presence in the market.The expected return of a market portfolio is identical to the expected return of the market as a whole.