Expected & Unexpected Returns on Assets: Definition & Examples

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  • 0:00 Return on Assets
  • 0:53 Expected Vs.…
  • 2:31 Efficient Markets
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Investment means trying to guess what the return on an asset will be. But sometimes, that can be tricky. In this lesson, we'll examine the expected and unexpected returns, including their relationship to news and how they relate to efficient markets.

Return on Assets

Deandra is the CEO of a big company, and there's a big meeting coming up. At this meeting, Deandra will announce the company's profits for the last quarter and the amount of the dividend the company will be paying their stockholders. Obviously, Deandra wants this meeting to go well!

But Deandra's curious about something. She's heard that her announcements at this meeting could influence the return of her company's stock. The return of an asset is what the asset will pay off. For example, if a stock goes up by $5, it has a return of $5.

Returns can be influenced by many things, including news and announcements, like Deandra's upcoming news. To help her understand better what might happen with her company's stock, let's look at expected and unexpected returns, as well as how they relate to efficient markets.

Expected vs. Unexpected Returns

Deandra's curious. She's heard that there are different types of returns. She wonders what they are and how they are different.

The expected return of an asset is what an asset should earn, based on what people know. Expected returns are predictable, because they are calculated using probability and information that is available. For example, Deandra's announcement about the profits of her company shouldn't surprise anyone. The information is easy to figure out based on sales figures that are available online. Not only that, but the company's profits haven't changed very dramatically.

Expected returns aren't usually changed by an announcement. Deadra's announcement about the profits is predictable and built into the expected returns of the stock. Thus, the announcement won't really change the return of the stock.

In contrast, the unexpected return of an asset is based on surprises to investors. These can be positive or negative surprises and have positive or negative results. For example, let's say that Deandra's company is going to be changing the dividend structure so that this quarter's dividend is a lot higher or lower than investors are expecting. This could have a positive or negative effect on the return of the stock. If the dividend is higher, the stock return will go up. If it is lower, the stock price will likely go down.

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