Necessary Rate Of Return

necessary

Under the theoretical framework of the capital asset pricing model, assuming that the market is balanced, capital is

Expected rate of return = necessary rate of return

Calculation of necessary rate of return

Necessary yield = risk-free yield +

= risk-free return + risk value coefficient * standard deviation rate

=Rf+b.V

Rf: a risk-free return rate.

B: the value at risk coefficient;

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.