If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?

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If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?

Risk and Rates of Return

Risk is the probability of an unfavorable outcome. It can also mean the failure to meet the desired return on an investment. Risk and return, in an efficient market, have a direct relationship in that the higher the risk, the higher the return should be for the investment. Rational investors also would not invest in an asset where they are not compensated properly for the risk that they bear when purchasing the same.

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Required Return vs. Cost of Capital

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Chapter 14 / Lesson 1
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