Required Rate of Return

What is Required Rate of Return?

The required rate of return is the minimum level of return that an investor expects to receive on an investment. It represents the amount of risk that the investor is willing to take in order to achieve a certain level of return, and is used to evaluate the potential return of different investment opportunities.

The required rate of return is typically expressed as a percentage and is used to calculate the present value of an investment. The present value is the value of an investment today, based on the expected future cash flows and the required rate of return. The higher the required rate of return, the lower the present value of the investment.

The required rate of return can be influenced by a variety of factors, including the level of risk associated with the investment, the investor's risk tolerance, and the returns available on alternative investment opportunities. It is an important concept in finance, as it helps investors to understand the trade-offs between risk and return and to make informed decisions about where to invest their capital.