Risk & returns
Expected value is the probability-weighted average of possible outcomes under a model. It describes the long-run centre of that model, not what must happen next.
Make it click
A game pays different amounts on different results. Multiply each amount by its chance and add them: the average can be useful even when no single play ever produces that exact figure.
Now put that into markets
Trading and investment choices can combine outcome size and probability into expectancy. Costs and estimation uncertainty belong inside the calculation.
A positive expected value can coexist with frequent losses or severe drawdowns. Estimated probabilities may change and rare outcomes can dominate the average.
List every material outcome, its sign, probability and source. Stress the tails and avoid probabilities inferred from the same small sample used to select the rule.
Expected value does not describe dispersion, sequence, liquidity needs or ruin risk. A model average can be wrong when its probabilities are wrong.
Takeaway
