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 ?
If partial cash flow discounting is used in the belief, as held by the Ministry, that the NPV of a cash flow can be found with a risk-free required rate of return. No method exists for finding the required rate for the residual discounted cash flow.
It can be established based on comparison with other companies in a sector or as a trade-off between liquidity and profitability related to the investors' required rate of return. Managers have to justify investment in inventory, cash or accounts receivables to calculate the current asset level necessary to perform on a competitive market.
The average value of the Sortino ratio achieved by the foreign funds was -0.14, meaning that the funds' returns on average fell below the minimum required rate of return. The lowest value was seen in the VB Dividend Invest scoring -0.33.
This is why they argue that the required rate of return on common stock in Bulgaria should not be higher than the required rate of return in the leading capital markets.
The required rate of return at each stage of the production process explains the effect of transfer pricing inflating accounting profits and hiding economic profits.
The required rate of return (cost of capital), which includes the risk premium for investment in stock, is used as an indicator of the level of risk.
The model is also commonly expressed in terms of the investor's required rate of return, which is written as:
Prior studies have determined risk-adjusted required rate of return for the entire firm, an enterprise's entire supply chain network, but not an individual project within the supply chain.
The rule is that if the IRR for an investment exceeds the required rate of return, then accept the investment; if IRR does not exceed the required rate of return, reject the investment.
Assume that earnings and book value grow at a constant rate (g), and that the difference between return on equity and required rate of return is constant for n periods.
Value of preferred share = Dividend (future income stream) / Required dividend yield (required rate of return)
While conceivably "there may be a clever way to slice and dice" such a transaction, in all likelihood, there would be a "toxic piece" that would force such a low price to compensate for an investor's required rate of return, that it would eliminate the benefits of completing such a transaction, Levine explains.

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