The expected rate of return on a stock represents the mean of a probability distribution of possible future returns on the stock. The table below provides a probability distribution for the returns on stocks 1 and 2.

Given a probability distribution of returns, the expected return can be calculated using the following equation:

where

• E[R] = the expected return on the stock,
• N = the number of states,
• p_i = the probability of state i, and
• R_i = the return on the stock in state i.