Partition of Investment Risk
The expected returns and the fluctuation in returns are two factors in evaluating investments.
Expected Returns
While the actual returns earned by a security in the past are vital information for the person already holding the security, data on the future or the forecast or the expected return from the security must be gathered by a prospective investor.
The calculation of expected rate of return is done by gathering data on the optimistic, pessimistic and most likely rates of returns and assigning probabilities to each of these three events.