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Expected rate of return is calculated as (Projection over or below RFR * Probability of scenario)_all\[ER=\sum_{i=1}^{n} (r _{i}*P _{i})\] where: \[r _{i}=projected return above or below RFR\] P= the probability of the above scenario Ex. If the market projection for a stock say 12% with a probability of .3, 14% with a probability of .6 & 16% with probability of .1 then ER = 12%*.3+14%*.6+16%*.1=14% This is then compared with the required rate of return RR to decide upon investments.
 2 years ago
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