Continued from here.
Expected Return‘s probably the most important, and most difficult, return to calculate & focus on. In its simplest form, it’s binary (deal success or failure), but by all means incorporate multiple outcomes into your analysis, if appropriate. In fact, if you’re contemplating other types of Event Driven investing, this multiple outcome approach will prove essential. However many outcomes, you calculate a Gross Return and a likely probability (which must sum to 1.00, of course) for each, and then combine these to arrive at an Expected Return. This will give you a much more accurate (and lower) deal return. Of course, you won’t actually see this return on any single deal – but over time, this is the best risk/reward measure to employ to evaluate deals & your potential average return. Of course, you can calculate an Expected IRR also, if you wish, but let’s not go crazy here..!