If you are investing in different assets and asset classes, you might wonder which return on your total investment to expect. It is a good practice to spread savings across different types of investments, such as stocks, bonds, real estate, commodities, gold or liquidity. However, the more investments you do, the harder is the prediction of your returns.
Use the below formula and our calculator to find out how much gains you can expect with your current asset allocation.
Calculator for the Expected Return of an Investment Portfolio (for up to 5 Assets / Asset Classes)
Fill in the requested parameters and calculate the return as an absolute and relative amount.
Required Input Parameters
To use this calculator, you need to provide the following input parameters:
Asset or Asset Class
Although this information is not required to perform the calculation, you can fill in the name or asset class of your investments. When you are gathering the data, this is useful to avoid double-counting of investments. Also, if you plan to print out the results, you would be better off having the labels printed as well, in addition to the numbers.
Fill in the amount of your investment for each asset or asset class. If you have already invested your money and wish to calculate the expected return based on its current value, enter the current value.
Expected Return Rate
Provide the expected return rate for each asset or asset class. When placing your investment, you have probably considered the potential gains that you are expecting.
If you do not have any clue, you can do some online research to find observed historical return rates of different asset classes. Blackrock, for instance, determined the following average annual returns for different asset classes from 2000 to 2019:
|Asset class||Average annual return|
|Small cap stocks||7.6%|
|Large cap stocks (value strategy)||7.0%|
|Fixed income bonds||5.0%|
However, note that historical values do not necessarily imply any information on future gains nor risks. For instance, if you invest in the early 2020s the expected returns on bond investments could be much lower given that the overall market interest rate has declined for some time already.
Expected Return Formula
To calculate the expected return on an investment portfolio, use the following formula:
Expected Return on Portfolio = a1 * r1 + a2 * r2 + a3 * r3 + a_n * r_n
a_n = the weight of an asset or asset class in a portfolio (calculated by dividing its value by the value of the entire portfolio),
r_n = the expected return of an asset or asset class,
a1 and r1 refer to the first asset, a2 and r2 to the second asset and a_n and r_n to any subsequent assets or asset classes.
While this is a basic approach that may be useful for individual and hobby investors, there are also more complex models that involve correlations and standard deviations such as the capital asset pricing model (CAPM; source).
In this example, a portfolio looks as follows:
|Asset class||Amount||Weight||Expected Return|
|Cash and Liquidity||$150,000||30%||1%|
The expected return of the portfolio is calculated by aggregating the product of weight and the expected return for each asset or asset class:
Expected return of the investment portfolio = 10% * 7% + 60% * 4% + 30% * 1% = 3.4%
You can also copy this example into Excel and do an individual calculation for your investments.
Diversified asset allocation is a good practice among individual and professional investors. If you follow this approach too, you can use the formula or our calculator to determine the overall expected return of your investment portfolio.
We hope that you have found this explanation and the tool useful. Feel free to also take a look at our other finance calculators.