What is meant by Required Rate of Return?

The Required Rate of Return refers to the minimum return that investors expect to receive from an investment in order to make it worthwhile, given its risk level. This concept is crucial in finance and investing as it helps investors evaluate whether an investment will provide sufficient returns to compensate for the associated risks. When determining the necessary rate of return, investors consider not only the potential gains but also the risks involved with the investment, the opportunity cost of capital, and the overall market conditions.

This understanding is foundational for making informed investment decisions, as it guides investors when comparing different investment opportunities and their respective risk profiles. It is not about maximizing returns or merely an average of expected market performance, but a threshold that must be met for an investment to be appealing. The focus on the minimum expected return underscores the importance of assessing risk versus reward in the investment process.