Expectation (Expected Value)
Expected value (or expectation) is simply the average of all possible outcomes.
Example 1. The price of a stock is $100. And, there are equal chances that after one year it could be $90, $110, $120 or remains the same.
(a) What is the expected value of the stock?
(b) What is the expected return from the stock?
Solution (a) As expected value is the average of all possible outcomes. Hence,
The expected return can be calculated using the formula