One way to think about the required rate of return is:
as the highest return a risk-averse investor wants from an investment. as the risk-free rate of return plus a risk premium. as the historical rate of return plus a risk premium. as a comparison between the expected and historical rates of return
A. as the highest return a risk-averse investor wants from an investment.
B. as the risk-free rate of return plus a risk premium.
C. as the historical rate of return plus a risk premium.
D. as a comparison between the expected and historical rates of return
What do you think?
http://www.investopedia.com/terms/r/requiredrateofreturn.asp
I think that it is B the risk rate of return plus a risk premium
I agree.
The required rate of return is a concept used to determine the minimum return that an investor expects from an investment to compensate for the level of risk involved. There are several ways to think about it:
1. As the highest return a risk-averse investor wants from an investment: This perspective considers the required rate of return as the minimum level of return that an investor demands to compensate for the risk taken. Risk-averse investors typically require higher returns for riskier investments.
2. As the risk-free rate of return plus a risk premium: The risk-free rate of return is the theoretical return an investor would receive from a risk-free investment, such as a government bond. The required rate of return is often calculated by adding a risk premium to the risk-free rate, which compensates investors for taking on additional risk.
3. As the historical rate of return plus a risk premium: Some investors base the required rate of return on historical investment returns. By examining the historical performance of similar investments or asset classes, they may add a risk premium to the average historical return to account for the inherent uncertainty in future returns.
4. As a comparison between the expected and historical rates of return: Another approach to determining the required rate of return involves comparing the expected rate of return (based on projected future performance) with the historical rate of return. If the expected rate of return is significantly higher than the historical rate, it may indicate that a higher required rate of return is needed to compensate for the increased risk.
Ultimately, the specific method of calculating the required rate of return may vary depending on the investor's risk tolerance, investment objectives, and individual preferences.