Required Rate of Return

The required rate of return is typically used when considering investing in a stock. Simply defined, the required return is the expected return in order for an investor to purchase an asset, in this case a stock.

When calculating the required return, you will be considering both the risk-free rate of return and the premium that you require for taking the risk. In this case as in others, when you use (or look at) the risk-free rate of return, you are referring to an investment like a U.S. Treasury bill.

In order to calculate the required return:

return = risk-free return + (market return - risk-free return) * beta