Required Rate of Return

Required Rate of Return (RRR)

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

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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.

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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.

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Required Rate of Return

What Does Required Rate of Return Mean?

The minimum rate of return needed to induce investors or companies to invest in something.

Investopedia explains Required Rate of Return

For example, if a person buys a stock, that person may desire a required rate of return of 10% per year. The investor's reasoning is that if he or she does not receive 10% return, he or she would be better off paying down an outstanding mortgage on which he or she is paying 10% interest.

Related Terms:
• Capital Asset Pricing Model—CAPM
• Discount Rate
• Expected Return
• Return on Assets—ROA
• Return on Investment—ROI