Required Rate Of Return - RRR

AAA

DEFINITION of '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).

INVESTOPEDIA EXPLAINS 'Required Rate Of Return - RRR'

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.


VIDEO

Loading the player...
RELATED TERMS
  1. Lease Rate

    The amount of money paid over a specified time period for the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that ...
  4. Return

    The gain or loss of a security in a particular period. The return ...
  5. Inflation-Adjusted Return

    A measure of return that accounts for the return period's inflation ...
  6. Systematic Manager

    A manager who adjusts a portfolio’s long and short-term positions ...
RELATED FAQS
  1. What are the drawbacks of using the Dividend Discount Model (DDM) to value a stock?

    Drawbacks of using the dividend discount model (DDM) include the difficulty of accurate projections, the fact that it does ... Read Full Answer >>
  2. How do I find the information needed for input into the Dividend Discount Model (DDM)?

    Analysts and investors should utilize a company’s financial statements, stock information websites and any number of analysis ... Read Full Answer >>
  3. What does the Dividend Discount Model (DDM) show an investor about a company?

    The dividend discount model, or DDM, is not designed to be used in forecasting any possible capital gains from increases ... Read Full Answer >>
  4. How do you calculate costs of capital when budgeting new projects?

    A new project only makes economic sense if its discounted net present value (NPV) exceeds the expected costs of financing. ... Read Full Answer >>
  5. What is the difference between the cost of capital and required return?

    The required rate of return, often referred to as required return or RRR, and cost of capital can vary in scope, perspective ... Read Full Answer >>
  6. How do treasury bill prices affect other investments?

    The prices for Treasury bills (T-bills) can have a significant impact on the risk premium charged by investors across the ... Read Full Answer >>
  7. How does the required rate of return affect the price of a stock, in terms of the ...

    First, a quick review: the required rate of return is defined as the return, expressed as a percentage, that an investor ... Read Full Answer >>
Related Articles
  1. Retirement

    Projected Returns: Honing The Craft

    Find out how to forecast long-term returns on the three major asset classes.
  2. Forex Education

    How To Calculate Required Rate Of Return

    The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it.
  3. Options & Futures

    Calculating The Equity Risk Premium

    See the model in action with real data and evaluate whether its assumptions are valid.
  4. Fundamental Analysis

    The Equity-Risk Premium: More Risk For Higher Returns

    Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium.
  5. Economics

    What is a Resident Alien?

    A resident alien is a foreigner who is a permanent resident of the country in which he or she resides but does not have citizenship.
  6. Economics

    Explaining Protectionism

    Protectionism is government measures that limit imports into a country to protect commerce within that country against foreign competition.
  7. Economics

    Calculating Net Realizable Value

    An asset’s net realizable value is the amount a company should expect to receive once it sells or disposes of that asset, minus costs from its disposal.
  8. Economics

    What is Neoliberalism?

    Neoliberalism is a little-used term to describe an economy where the government has few, if any, controls on economic factors.
  9. Economics

    Understanding Natural Unemployment

    Natural unemployment is often defined as the lowest rate of unemployment an economy will reach.
  10. Fundamental Analysis

    Understanding Modern Portfolio Theory

    Modern portfolio theory describes ways of diversifying assets in a portfolio in order to maximize the expected return given the owner’s risk tolerance.

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!