Answer :
Final answer:
Expected return on investment is a probable return estimated based on the investment's risk. Riskier investments may yield higher returns but also bear higher chance of losing money. Thus, balance between risk and reward is important. Stocks generally yield higher returns than bonds or savings accounts, and simple interest is calculated only on the initial principal.
Explanation:
The return on the investment depends on the level of risk associated with each investment. In finance, the expected return is calculated as a sum of possible returns each multiplied by the probability of that return occurring. For instance, an investment with a 10% chance of a $5,000,000 return, 30% chance of $1,000,000, and 60% chance of losing $1,000,000 would have an expected return of ($5,000,000*0.10) + ($1,000,000*0.30) + (-$1,000,000*0.60) = $500,000 - $600,000 = -$100,000.
An investment is considered risky when there is a significant chance of losing money. However, risky investments may also provide higher returns. It's important to find a balance between risk and reward, depending on one's own risk tolerance. The safest investment is the one that guarantees the return of the initial investment with the least risk, even though its returns may be lower.
As a general rule, stocks have been shown to have a higher average return over time than bonds or savings accounts, although they also come with a higher level of risk. Simple interest is also important in finance. It's the interest calculated on the initial principal amount only. For example, the total interest from a $5,000 loan after three years with a simple interest rate of 6% can be calculated as $5,000*0.06*3 = $900.
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