Question

Explain the differences between expected return and required rate of return?

Answer 1

The expected return is the return expected from an asset in the future based on its future cash flow and initial investment.

The required rate of return is the minimum return the investors need to invest in the asset. It is estimated using CAPM:

Where, rf is the risk-free rate

rm is the market return

And beta measures the systematic risk.

The investors only invest in an asset if the asset's expected return is greater than the required rate of return.