What is expected return?
Our asset allocation investment strategy consists of choosing the mix of investments with the highest expected return given that it does not exceed a fixed maximum risk. This means that, according to our calculations, the investment mix that we select should typically have a return higher than any other investment mix.
To understand expected return better, note the following points.
- We only consider investment mixes whose risk is lower than some fixed maximum risk. Thus, it is possible that there is an investment mix with a higher expected return than the one that we pick. But this other investment mix would have a risk that is unacceptably high for us.
- An investment mix having the highest expected return does not mean that it will actually have the highest return during the time period for which it is recommended. We do not know the future — no one does. What it does mean is that over the long-term, according to our calculations, many of the investment mixes that we pick should have the highest return.