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How to Calculate the Expected Growth in Probability Distributions

Original post by Stephanie Ellen of Demand Media

An expected rate of return can be used with any investment.

The expected growth in probability distributions can give you a realistic idea of an investment's performance. While a snapshot of an investment's return on any particular date can give you a snapshot of a stock's performance, probability theory can give you a more accurate picture of what to expect from your investment. Expected growth gives you the average rate of return for a period of time.

Contents

Step 1

Gather the data. In order to calculate expected growth for an investment, you'll need to know how that investment has performed in past years. Locate this information in the business section of the newspaper or on the company's website.

Step 2

Multiply the probability of each particular return with the return rate. For example, if an investment has a 30 percent change of earning 10 percent interest, and a 70 percent change of earning 5 percent interest then calculate .30 x .10 = .03 and .70 x .05 = .035.

Step 3

Add the results you calculated in Step 2 together. In this example, the expected rate of return is .03 + .05 = .08 or 8 percent.


                   

Things Needed

  • Probability distribution for an investment

References

About the Author

Stephanie Ellen teaches mathematics and statistics at the university and college level. She coauthored a statistics textbook published by Houghton-Mifflin. She has been writing professionally since 2008. Ellen holds a Bachelor of Science in health science from State University New York, a master's degree in math education from Jacksonville University and a Master of Arts in creative writing from National University.

Photo Credits

  • Thinkstock Images/Comstock/Getty Images


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