Question

If the probability of all possible outcome for an investment are equal, then the expected return is equal to the average return?

True or false?

Answer 1

Suppose there are n outcomes

Expected return

Probability of each return = 1/n [The probability of each outcome is equal]

Returns for n outcomes are: R1, R2, ....., Rn

The expected return is calculated using the formula:

Expected return = p1*R1 + p2*R2 +...+ pn*Rn = (1/n)*R1 + (1/n)*R2 +...+ (1/n)*Rn = (R1+R2+...+Rn)/n

Average return

The average return is calculated using the formula:

Average return = (R1+R2+..+Rn)/n

Hence, we can say that if the probability of all possible outcome for an investment are equal, then the expected return is equal to the average return

Answer -> True