Required Rate Of Return - RRR


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).


Loading the player...

BREAKING DOWN '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.

  1. Lease Rate

    The amount of money paid over a specified time period for the ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required ...
  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. Encumbrance

    A claim against a property by a party that is not the owner. ...
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares Russell 1000 Value

    Learn about the iShares Russell 1000 Value exchange-traded fund (ETF), which invests in value stocks that are included in the Russell 1000 Value index.
  2. Retirement

    Projected Returns: Honing The Craft

    Find out how to forecast long-term returns on the three major asset classes.
  3. 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.
  4. Options & Futures

    Calculating The Equity Risk Premium

    See the model in action with real data and evaluate whether its assumptions are valid.
  5. 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.
  6. Economics

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  7. Professionals

    How to Sell Mutual Funds to Your Clients

    Learn about the various talking points you should cover when discussing mutual funds with clients and how explaining their benefits can help you close the sale.
  8. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  9. Professionals

    Fund and ETF Strategies for Volatile Markets

    Looking for short-term fixes in reaction to market volatility? Here are a few strategies — and their downsides.
  10. Investing

    How Diversifying Can Help You Manage Market Mayhem

    The recent market volatility, while not unexpected, has certainly been hard for any investor to digest.
  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. 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 >>
  3. 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 >>
  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 >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
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!