The required rate of return on an asset is a function of the:
A) risk associated with the asset
B) risk-free interest rate
C) age of the asset
D) risk associated with the asset and the risk-free interest rate
Required Rate Of Return:
Required rate of return is the minimum expected return on the asset. Alternatively, the required rate of return on a specific asset can be defined as the opportunity cost that an investor undertakes by giving up other potential investments.
Answer and Explanation:
The answer is D) risk associated with the asset and the risk-free interest rate
Required rate of return = Risk-free rate + (Expected market return - Risk-free rate) x Beta
It is obvious that the required rate of return would consider both risk-free rate and its risk over the market. Note that, beta of the asset measures how its value fluctuates against the entire market.
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fromChapter 1 / Lesson 29
Both investors and businesses have a required rate of return (RRR) for potential investments and projects. We will use examples and formulas to calculate an RRR for both.