Required Rate of Return


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Required Rate of Return (RRR)

The minimum expected yield by investors require in order to select a particular investment.

Required Rate of Return

In securities, the minimum acceptable rate of return at a given level of risk. Different investors have different reasons for choosing their required returns. Normally, it is determined by a person's or institution's cost of capital. For example, an investor may also carry a debt with a high interest rate; if an investment does not meet a required rate of return, it would make more sense for the investor to pay down his/her debt. The required return is also related to the amount of risk an investor is willing to accept. One with a portfolio consisting largely of bonds will generally have a lower required return than one whose portfolio contains mainly stocks. See also: Markowitz Portfolio Theory.

required rate of return

1. The minimum rate of return that an investment must provide or must be expected to provide in order to justify its acquisition. For example, an investor who can earn an annual return of 11% on certificates of deposit may set a required rate of return of 15% on a more risky stock investment before considering a shift of funds into stock. An investment's required return is a function of the returns available on other investments and of the risk level inherent in a particular investment.
2. The minimum rate of return required by an investor, a stipulation that limits the types of investments the investor can undertake. For example, a person with a required rate of return of 15% would generally have to invest in relatively risky securities.
References in periodicals archive ?
Many believe that diversification reduces overall business risks, which would suggest a lower required rate of return on equity and hence an increase in shareholder value.
This explains why the required rate of return on human capital exceeds that on tangible investments.
Remember: the required rate of return on an investment reflects the degree of risk of the investment.
As mentioned above, I think this required rate of return is too low.
Jones and Roach imply that we assumed the capitalization rate and the required rate of return were equal for the Neighborhood Shopping Center case.
Expectations about dividends may change, or the required rate of return may change.
Holding period costs, which consider inventory turns or production time, as well as the required rate of return, are also estimated.
The discount factor, or required rate of return, applied to future financial results is unique for any given company and is a function of market interest rates, the general risk associated with the equities markets at any point in time, risk factors peculiar to the industry or industries in which the company operates, and company-specific risks that may reflect such factors as the product portfolio, potential legal liabilities, perceived opportunities or vulnerabilities, and, importantly, the credibility of management.
3) The asset's required rate of return, k, is used to discount the project's expected cash flows.
In the income approach, a discounted cash flow analysis is often prepared which equates future cash flows to a present value equivalent by applying a required rate of return on capital employed.
In simple terms, risk can be thought of as the possibility of failing to achieve a required rate of return over a given time period.
Models of insurance price determination [Biger and Kahane (1978), Kahane (1978), Fairley (1979), Hill (1979), Myers and Cohn (1981), Kraus and Ross (1982) and Venezian (1983)] lead to the conclusion that calculation of the required rate of return on equity from entering the insurance business should reflect both underwriting income and income derived from the investment of reserves and net worth.

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