Consider two projects, a and b. project b is riskier than project a. therefore, project b should have a lower price, a higher expected return, and a higher risk premium than project a.
The expected rate of return is the amount of profit or loss an investor can expect on an investment. The expected rate of return is calculated by multiplying the potential outcomes by the probabilities of them occurring and then summing those outcomes.
The expected return is a measure of probability designed to indicate the likelihood and expected to return of a particular investment to produce a positive return. The purpose of calculating the expected return on investment is to give the investor an idea of the likely rewards and risks.
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