I am told that if I invest $20 in this Apple Stock, in one years time there is a:

  • 10% chance I'll get back $25
  • 10% chance I'll get back $20
  • 30% chance I'll get back $15
  • 50% chance I'll get back $10

So my what I'm calling my "Return on Investment" would be: $25 * .1 + $20 * .1 + $15 * .3 + $10 * .5 = $14

I'm assuming this is some sort of statistical calculation that I just did, but I'd like to know the name of this statistical process. (I would say something like amortization, but that's not right.)

  • 1
    You may call it "average expected return". zenwealth.com/businessfinanceonline/RR/ExpectedReturn.html – user66974 Feb 2 '16 at 20:43
  • 1
    @Josh61 Possibly, I think you answered it right there though "Probability Distribution" perhaps? – Jonathan Mee Feb 2 '16 at 20:54
  • 2
    @FumbleFingers Quite. Just as there are 1.15 children in an average family. – anemone Feb 2 '16 at 21:38
  • 1
    The method is a fundamental technique in probability theory and has application in many fields beyond finance. When I studied this it was described as the summation of the value of the outcomes multiplied by their probabilities but I don't recall ever hearing a specific name for it. – Al Maki Feb 2 '16 at 22:28
  • 1
    The non-technical term that applies to your example is "counting your chickens before they are hatched." – ab2 ReinstateMonicaNow Feb 2 '16 at 23:52

The "return" you describe is usually called expected value (see also weighted average). For the process of determining it, I think no special term exists beyond the usual ones such as "calculating", "determining", "estimating", etc.

  • 1
    I was hoping that wasn't the case, but thanks for the confirmation. – Jonathan Mee Feb 2 '16 at 21:42

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.