The required rate of return (hurdle rate) is the minimum return that an investor is expecting to receive for their investment. Essentially, the required rate is the minimum acceptable compensation for the investment’s level of risk. The required rate of return is a key concept in corporate finance and equity valuation.

What is the return to the investor?

Return on investment (ROI) is calculated by dividing the profit earned on an investment by the cost of that investment. For instance, an investment with a profit of $100 and a cost of $100 would have a ROI of 1, or 100% when expressed as a percentage.

What are the determinants of RRR?

Factors that influence RRR include risk of the investment, the duration, inflation and liquidity factors. Inflation as well as other factors that affect the rate of return must be factored in when calculating the RRR of an investment.

What is a required return on a bond?

Required yield is the return on a fixed-income security that would make it at least an expected break-even investment. The required yield will be reflected in a bond’s market price existing as a discount or premium relative to similar bonds.

What are the three factors that influence the required rate of return by investors?

Any bondholder, or any investor for that matter, will allow three factors to influence his or her required rate of return. The three factors are the following: real (pure) rate of return, inflation, and risk premium.

What are the three 3 factors that influence the required rate of return by investors?

The required rate of return is influenced by the following factors:

• Risk of the investment. A company or investor may insist on a higher required rate of return for what is perceived to be a risky investment, or a lower return on a correspondingly lower-risk investment.
• Liquidity of the investment.
• Inflation.

Is the required rate of return the same for all investors?

Also, keep in mind that the required rate of return can vary among investors depending on their tolerance for risk.

What is the required rate of return?

The required rate of return is the minimum return an investor expects to achieve by investing in a project. An investor typically sets the required rate of return by adding a risk premium to the interest percentage that could be gained by investing excess funds in a risk-free investment.

Is the required rate of return ( RRR ) subjective?

However, inflation expectations are subjective and can be wrong. Also, the RRR will vary between investors with different risk tolerance levels. A retiree will have a lower risk tolerance than an investor who recently graduated college. As a result, the RRR is a subjective rate of return.

What’s the difference between expected return and required return?

Expected return, on the other hand, is the return that the investor thinks they can generate if the investment is made. If the security is valued correctly the expected return will be equal to the required return and the net present value of the investment will be zero.