# Reading 19 Section 4 Prob-wtd return vs Exp. return

To illustrate, assume that a portfolio associated with a goal has an expected return of 7% with 10% expected volatility and the investor has indicated that the goal is to be met over the next five years with at least 90% confidence. Over the next five years, that portfolio is expected to produce returns of 35% with a volatility of 22.4%.25 In short, this portfolio is expected to experience an average compound return of only 1.3% per year over five years with a probability of 90%; this result is quite a bit lower than the portfolio’s average 7% expected return (see Exhibit 34).

Does anyone know how the reading is calculating this 1.3% number? I don’t really understand the section & what the reading is trying to get at

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They probably did a Monte Carlo simulation.

Simplify the complicated side; don't complify the simplicated side.

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The 1.3% is not shown how they calculate it, but it is likely a monte carlo type of calculation to come up with probabilities. Look at Exhint 36 which shows numbers.