The Required Rate of ReturnThe required rate of return is the nominal rate of return that an investor needs in order to make an investment worthwhile.
This return varies over time and is comprised of the following:
 Real riskfree rate
 Inflation premium
 Risk premium.
Real riskfree rate of return
The real riskfree rate of return (R_{f}) is the minimum return an investor requires. This rate does not take into account expected inflation and the capital market environment.
Formula 17.1 Real risk free rate (R_{f}) = (1 + nominal riskfree rate)  1 (1 + inflation rate) 
Example: Real riskfree rate of return
Determine the real riskfree rate if the nominal riskfree rate is 8% and the inflation rate is 3%.Answer:
R_{f} = (1 + 0.08)  1 = 4.85%
(1 + 0.03)
Nominal riskfree rate of return (R_{nominal})
This is simply the real riskfree rate of return adjusted for inflation.
Formula 17.2 Nominal riskfree rate = (1 + riskfree rate) x (1 + rate of inflation)  1 
Example: Nominal riskfree rate of return
Determine the nominal riskfree rate of return if the riskfree rate is 3% and the rate of inflation is 3%.Answer:
R_{nominal} = (1 + 0.03) x (1 + 0.03)  1 = 6.09%

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