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State Contingent Expected Returns Calculator

State Contingent Expected Returns Calculator

Use our quick and handy calculator to calculate the State Contingent Expected Return for your stock. This calculator uses the formula for state contingent expected returns as:

    \[E[r_j] = \sum_{i=1}^k E[r_{ji}] p_i\]

Where:

  • E[r_{ji}] refers to the expected return of a stock j in state i \in \{1...k\}
  • p_i reflects the probability of a given state i occurring

Handy Hacks

Use the following numbers as an example scenario so you can see how the calculator behaves. You can then use your own numbers to get to the estimate you’re after!

Consider a 2 states “Good” and “Bad” where the expected return for a stock j can either be 30% or -10% respectively. Suppose the probability of the “good state” occurring is 40%, and the probability of the bad state occurring is 60%.

The expected return for the stock overall is equal to 6%. See if you can get to that by using the numbers we’ve provided in the calculator:

  • Probability of State 1 (“Good case”): 0.4
  • Probability of State 2 (“Bad case”): 0.6
  • Expected Return in State 1 (“Good Case”): 30
  • Expected Return in State 2 (“Bad Case”): -10

❗️Always remember, the sum of probabilities you input MUST equate to 1.

Estimation of state contingent expected returns is covered extensively in the following courses: