## 3 components of required rate of return

The main components of the required rate of return include: Time value of money. Money is known to change in value with time. Money usually lose value as time elapses. In finance, the rate of return is a profit from an investment whereas the set rate determines the profit. For example, if an investor receives 10% for every $100 invested then the rate of return would be $10.00. The required rate of return (RRR) is the minimum amount of profit (return) an investor will receive for assuming the risk of investing in a stock or another type of security. RRR also can be used Three components of nominal rate of return. A real rate of return, a rate of inflation, compensation for the inflation loss on the dollars earned on the investment. What factors determine the shape of the term structure of interest rates?

## 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 of return is the minimum acceptable compensation for the investment’s level of risk. Corporate Finance Institute .

The required rate of return is the minimum that a project or investment must earn before company management approves the necessary funds or renews funding for an existing project. It is the risk-free rate plus beta times a market premium. Beta measures a security's sensitivity to market volatility. Market premium Answer to Discuss the three components of an investor’s required rate of return on an investment.. 1 Answer to three components of an investor's required rate of return on an investment - 1539834 three components of an investor's required rate of return on an investment Apr 20 2016 05:29 AM. 1 Approved Answer. Nitesh K answered on October 20, 2016. 5 Ratings If the expected return of an investment does not meet or exceed the required rate of return, the investor will not invest. The required rate of return is also called the hurdle rate of return. Required Rate of Return Explanation. Required rate of return, explained simply, is the key to understanding any investment. In financial theory, the rate of return at which an investment trades is the sum of five different components. They are: 1. The Real Risk-Free Interest Rate This is the rate to which all other investments are compared. It is the rate of return an investor can earn without any risk in a world with no inflation. 2. An Inflation Premium T or F The three components of the required rate of return are the nominal interest rate, an inflation premium, and a risk premium. False T or F As the level of risk increases an investor will require an expected return that will compensate for this additional risk.

### Three components in an investor's required rate of return • Time value of money --- real rate of return • Inflation --- expected inflation premium • Risk --- risk

10 Jun 2019 It is also called cost of common stock or required return on equity. There are three methods commonly used to calculate cost of equity: the

### Expected Return Formula – Example #3. Let's take an Expected Return for Portfolio = ∑ Weight of Each Component * Expected Return for Each Component .

the required risk premium on a portfolio and the price at which the portfolio will sell? 5. Consider a portfolio that offers an expected rate of return of 12% and An expected rise in interest rates — though to levels that would be much lower compared with history — should also detract from future equity and credit returns.

## In financial theory, the rate of return at which an investment trades is the sum of five different components. They are: 1. The Real Risk-Free Interest Rate This is the rate to which all other investments are compared. It is the rate of return an investor can earn without any risk in a world with no inflation. 2. An Inflation Premium

An expected rise in interest rates — though to levels that would be much lower compared with history — should also detract from future equity and credit returns.

To determine the required rate of return on a share of stock you set R = (Div/P) + g. This formula is made up of two components, the dividend yield and the capital gains yield. The dividend yield is the ratio of the expected cash dividend to the current price of the share (Div/P).