What is the difference between required return and expected return

Personal Finance. Your Practice. Popular Courses. Investing Fundamental Analysis. Table of Contents Expand. What Is Required Rate of Return? Required Rate of Return vs. Cost of Capital. Key Takeaways The required rate of return is the minimum return an investor will accept for owning a company's stock, to compensate them for a given level of risk. To accurately calculate the RRR and improve its utility, the investor must also consider his or her cost of capital, the return available from other competing investments, and inflation.

The RRR is a subjective minimum rate of return; this means that a retiree will have a lower risk tolerance and therefore accept a smaller return than an investor who recently graduated college and may have a higher appetite for risk. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

What Is the Cost of Equity? The cost of equity is the rate of return required on an investment in equity or for a particular project or investment. What Does Cost of Capital Mean? Cost of capital is a calculation of the minimum return a company would need to justify a capital budgeting project, such as building a new factory.

Partner Links. Related Articles. Investopedia is part of the Dotdash publishing family. The RRR represents the absolute minimum return on investment you would accept for that investment to be worthwhile. If you need a 4 percent return on your money to make your investment advantageous, then this is your RRR.

For example, if your RRR is 4 percent and the investment returns 2 percent, then you probably want to skip it. This is because risk-free investments are available through the U. For an investment to truly be worth the risk, it should substantially outperform the risk-free securities offered by the government. From my undestanding , in the scope of PM, yes, they are the same. That is the rate you require, or you expected the security would gain based on the level of risks systematic and unsystematic.

I m nt currently taking help of book to answer ur quest. Required return and expected return are similar to each other in that they both evaluate the levels of return that an investor sets as a benchmark for an investment to be considered profitable.

The required rate of return represents the minimum return that must be received for an investment option to be considered. 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. However, if the required return is higher than the expected rate the investment security is considered to be overvalued and if the required return is lower than the expected the investment security is undervalued.