How is expected return defined in Modern Portfolio Theory?

The definition of expected return in Modern Portfolio Theory is centered around the idea of calculating the weighted average of all possible returns on an investment, taking into account the probabilities associated with each of those returns. This approach allows investors to estimate what they might earn in the future based on various scenarios and their respective likelihoods.

By considering both the potential returns and their probabilities, this method provides a more nuanced view of investment performance, as it acknowledges that not all outcomes are equally likely. This focus on the relationship between risk and return is a core principle of Modern Portfolio Theory, which emphasizes diversification and the importance of understanding how various investments will perform under different market conditions.

In contrast, relying solely on historical data, looking at past performance of similar types of investments, or making projections based on market trends doesn't capture the range of possible outcomes and their likelihoods, which is essential to the concept of expected return in this framework.