# 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 ?
The second method estimates future cash flows and required rates of return for similar risks to determine value--the "cash flow modeling" method.
The cost of adjusting to the higher risk weights for mortgages will be distributed between banks' owners and mortgage borrowers according to how the rule change impacts on banks' required rates of return.
RIVC and RIVI are the implied required rates of return on equity capital from the Ohlson (1995) model.
Fitch believes "this is a hardening market, in contrast to a hard market where rates are at a level consistent with returns at or above required rates of return on capital.
The discount rate is also referred to as the "required rate of return" Required rates of return for buyers of small and mid-size private companies are in the 25% to 33% range.
Table 1: Stages, Periods and Required Rates of Return (ROR) Stage Annual ROR % Investment Period (years) Seed & Start-up 50-100+ <10 First Staqe 40-60 5-10 Second Stage 30-40 4-7 Expansion 20-30 3-5 Bridge & mezzanine 20-30 1-3 Leveraqed Buy Outs 30-50 3-5 Turnarounds 50+ 3-5
The problem is compounded when the required rates of return differ at each stage of the production process.
To take account of differences in costs of capital, risk premia and required rates of return between developed and emerging markets, different ratings bands are applied in the Australia, United kingdom and South Africa respectively (as shown above).
Discounted-cash-flow models suggest that firms with higher growth prospects and lower required rates of return should have their equity trade at larger multiples of earnings relative to equities with contrary characteristics.
The CAPM pricing equation provides the required rates of return on individual assets and portfolios.
Changes in mortgage rates and required rates of return clearly have substantial effects on fundamental values.
Question--What is the relationship between investors' required rates of return and bond prices?

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