Expected returns are the anticipated profit or loss from an investment over a certain period.

Expected Returns are predictions based on historical data, market trends, or statistical models and are crucial for investment planning and risk assessment.

Unlike actual returns reflecting past performance, expected returns are forward-looking estimates.

For example, let's consider an investor, Sarah, looking to invest in mutual funds.

She examines a fund with an average eight percent annual return over the past five years.

Sarah anticipates a similar return in the upcoming year based on this historical performance and her research analysis of the fund's portfolio.

This means her expected return from investing in the fund is eight percent.

Expected returns are not guaranteed as they are subject to various risks and market uncertainties.

If market conditions change drastically due to economic stability, geopolitical events, or changes in industry trends, Sarah's actual return on the fund might be significantly lower or higher than her expected return.

Sarah often diversifies her investments across multiple assets to reduce the risk of relying on the expected returns of a single investment.