Expected value

The probability-weighted average of all possible outcomes: what would be averaged over many repetitions, not necessarily a value that can occur. Two prospects sharing it can carry very different downside.

Where you will meet it

Expected value appears in 8 learning outcomes on the CFA syllabus. A few of them:

• Value a share by weighting several scenarios by their probabilities
  CFA Level I · Equity Investments

  “With values of 30, 45 and 20 and probabilities of 0.5, 0.2 and 0.3, the expected value is 15 + 9 + 6 = 30.”

• Work out a random variable's expected value and variance
  CFA Level I · Quantitative Methods

  “Expected value is the probability-weighted average of every possible outcome: E(X) = sum of p(x) times x.”

• Explain models that generate returns, the market model among them
  CFA Level I · Portfolio Management

  “The beta term is the systematic part of the return, the alpha is the intercept, and the residual captures firm-specific news with an expected value of zero.”

• Assess a company's exposure to ESG risks and the investment opportunities ESG creates for it
  CFA Level II · Corporate Finance

  “Most effects work through cash flows: a carbon price adds costs, net of any amount passed on to customers and of tax relief; a probable fine or clean-up is included at its expected value; new products add revenue.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with E · Glossary