Which of the following best defines the expected return of an investment in securities?

• A. The actual return realized from an investment over a specific period.
• B. The highest possible return that can be earned from an investment.
• C. The guaranteed minimum return specified by the issuer of the security.
• D. The weighted average of all possible returns, where each return is weighted by its probability of occurrence.

Answer: (D)

Verified step by step guidance

1. Understand the concept of 'expected return': It is a statistical measure used in finance to estimate the average return an investor can anticipate from an investment, based on the probabilities of various outcomes.
2. Recognize that the expected return is calculated as a weighted average: Each possible return is multiplied by its probability of occurrence, and the results are summed up.
3. Express the formula for expected return mathematically: \( E(R) = \sum_{i=1}^{n} P_i \cdot R_i \), where \( E(R) \) is the expected return, \( P_i \) is the probability of outcome \( i \), and \( R_i \) is the return for outcome \( i \).
4. Clarify that the expected return does not guarantee a specific outcome: It is a theoretical measure based on probabilities and does not reflect the actual return realized from the investment.
5. Conclude that the correct definition of expected return is 'The weighted average of all possible returns, where each return is weighted by its probability of occurrence.'