What method uses a probability-weighted approach to estimate expected returns?

The method that utilizes a probability-weighted approach to estimate expected returns is the Probability-Weighted Expected Return Method (PWERM). This approach involves assessing various potential outcomes of an investment and assigning probabilities to each scenario. By multiplying the expected returns of each outcome by its associated probability, it generates a weighted average return that reflects the likelihood of each scenario occurring.

This method is particularly useful in situations where there are uncertain future cash flows or returns, as it helps to incorporate the inherent risks into the valuation process. By using a probability-weighted analysis, it provides a more nuanced and realistic estimate of expected returns than simpler models that may overlook the variability and uncertainties involved. This can be especially valuable in corporate finance, where decision-makers aim to evaluate the impact of various risks on potential investments.

Thus, PWERM is favored for its systematic approach to integrating risk into projected returns, making it a significant tool in the analysis and strategic planning within finance.