Required Rate Of Return - RRR
- Required Rate Of Return - RRR
- The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project. The required rate of return (RRR) is used in both equity valuation and in corporate finance.
Investors use the RRR to decide where to put their money. They compare the return of an investment to all other available options, taking the risk-free rate of return, inflation and liquidity into consideration in their calculation. For investors using the dividend discount model to pick stocks, the RRR affects the maximum price they are willing to pay for a stock. The RRR is also used in calculations of net present value in discounted cash flow analysis.
Corporations use the RRR to decide if they should pursue a new project or business expansion; in corporate finance, the RRR is equal to the weighted average cost of capital (WACC).
You might require a return of 9% per year to consider a stock investment worthwhile, assuming that you can easily sell the stock and inflation is 3% per year. Your reasoning is that if you don't receive a 9% return, which is really a 6% return after inflation, then you'd be better off putting your money in a CD that earns a risk-free 3% per year (really 0% after inflation). You aren't willing to take on the additional risk of investing in stocks, which can be volatile and whose returns are not guaranteed, unless you can earn a 6% premium over the risk-free CD. The RRR will be different for every individual and every company depending on their risk tolerance, investment goals and other unique factors.
Investment dictionary.
Academic.
2012.
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required rate of return — ( RRR) The minimum expected yield by investors require in order to select a particular investment. Bloomberg Financial Dictionary … Financial and business terms
Market Required Rate of Return Schedule — See: Market RRR Schedule; RRR … Financial and business terms
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RRR — ( required rate of return) The minimum expected yield by investors require in order to select a particular investment. Bloomberg Financial Dictionary … Financial and business terms
Market RRR Schedule — Market Required Rate Of Return Schedule ; RRR A line that indicates the minimum return required by investors at each level of investment risk. The schedule begins at the risk free interest rate and rises as risk increases. Bloomberg Financial… … Financial and business terms
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