Expected Return

The expected return is the profit or loss an investor anticipates earning on an investment over a specific period. It is a probabilistic estimate calculated by weighing potential outcomes by their likelihood of occurring.

In the context of derivatives, the expected return is influenced by the underlying asset's growth rate and the volatility of the option. Traders use this metric to decide whether the risk of a trade is justified by the potential reward.

While it is a theoretical calculation, it provides a crucial benchmark for portfolio management. It must be carefully balanced against risk metrics like standard deviation and maximum drawdown.