What Is The Necessary Rate Of Return?

The necessary rate of return (also known as the minimum necessary rate of return or the minimum required rate of return) indicates the minimum rate of return that investors reasonably demand for an asset.

Under the theoretical framework of the capital asset pricing model, assuming that the market is balanced, the capital asset pricing model can also be described as:

Expected rate of return = necessary rate of return

Necessary yield

Necessary yield = risk free return + risk return rate

= risk-free return + risk value coefficient *

=Rf+b.V

Rf: a risk-free return rate.

B: risk

V: standard deviation.

Example: the short-term treasury bond interest rate is 6%, the expected yield of a stock is 20%, its standard deviation is 8%, and the value at risk coefficient is 30%, then the stock's necessary yield is 18%.

The risk return rate is bV=30% x (8% * 20%) =12%; the necessary yield = Rf+bV=6%+12%=18%.

Factors affecting necessary yield

Factors that affect the necessary rate of return:

(1) risk-free return rate

(2) systemic risk

(3) market risk premium.