How Is Required Rate of Return Determined on Stocks?


Quick Answer

Required rate of return, or RRR, is the minimum acceptable yield a stock must give before it is purchased. Additionally, RRR helps analyze project funding, equipment purchases or joint ventures decisions.

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Full Answer

RRR is a component in two approaches for evaluating stocks, the capital asset pricing model, or CAPM, and dividend discounting. For CAPM, first find the difference for market return and a stock's risk free rate, or RFR. Then, this difference is multiplied by the stock's beta, a statistic showing variance to the market. Lastly, adding the result to the stock's risk free rate determines RRR. Rate values for RFR and beta are analytical standards available at brokerages.

Dividend discount says a stock's RRR is a stock's dividend payment divided by the stock's value. Adding this result to a stock's growth rate gives the RRR.

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