How to Calculate the Expected Growth in Probability Distributions

by Stephanie Ellen

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.

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.

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.

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.

Items you will need

  • Probability distribution for an investment

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