Required Rate of Return

The required rate of return is the minimum return an investor will accept for holding an asset, given its risk. For a stock, the required return is the cost of equity. For a bond, it is the yield lenders demand. For a project, it acts as the hurdle rate.

CAPM gives a stock's required return as the risk-free rate plus beta times the equity risk premium, or 11% with this site's inputs. If you expect a stock to return more than that, it looks cheap. If you expect less, it looks expensive. The FAQ on whether cost of equity is the same as the required rate of return explains that gap.

Required return rises with risk, which the security market line shows as a straight line against beta. It is also the discount rate for that investor's cash flows. See also cost of equity and hurdle rate.