Ace the CMA 2025 Challenge – Unlock Your Accounting Superpowers!

The expected rate of return is calculated by taking each possible rate of return of an investment and multiplying it by its probability of occurrence. This method incorporates the likelihood of various outcomes, allowing for a more accurate representation of what an investor might expect over time. It can be expressed mathematically as follows:

Expected Rate of Return = Σ (Probability of Return * Possible Return)

This approach is particularly useful in the evaluation of investments with varying potential returns, giving a weighted average that reflects not only the returns but also the uncertainties associated with them.

Other answer choices do not accurately represent the calculation of the expected rate of return. Simply averaging returns multiplied by standard deviation does not account for the probabilities of each return occurring. The division of total return by total investment does not consider multiple possible outcomes, and investment gain divided by risk is not a standard formula for determining expected returns, as it conflates concepts of yield and risk. The focus on the probabilistic approach in calculating expected return provides a comprehensive view of potential investment performance.