Required Return

• The required rate of return or required return is the return an investor needs to justify an investment. It is expressed as a percentage and it increases as risk increases. One of the simplest illustrations of required return is a scenario in which an investor obtains a loan to make an investment. At a minimum, the required return on the investment must be greater than the interest rate of the loan to make the investment worthwhile.
  
  

Stocks Vs. Bonds

• The required return on a stock investment is generally higher than the required return on a bond investment. The reason for this is that stocks generally have a higher risk factor than bonds. Bonds offer guaranteed interest and the risk of default is low or practically non-existent in many cases. Stock prices fluctuate much more widely than bond prices and do not have the guaranteed interest of bonds, although some stocks do offer dividends.
  
  

Determining Required Return

• While there are some fundamental factors to consider when determining the required return for an investment, the process is somewhat subjective. Each investor must evaluate his own goals and risks to determine appropriate required returns. If an investor sets reasonable required returns, they will be higher for stocks as opposed to bonds simply as a consequence of the higher risk inherent in stocks.