Question

Explain and provide examples of Return on an Investment Income, Capital Appreciation). What are the differences between expected return and
required return.

Answer 1

Return on Investment is the return generated on an investment relative to the investment made. It is a performance measure to know about the profitability of an investment. For example if a share is purchased ar $10. After one year it is sold when the price increases to $12 and a dividend of $1 is given. In this case Return on Investment will be = Appreciation + Dividends received

= (12-10) + 1
= $3 i.e 30%

Capital Appreciation is defined as an increase in investment market price.It can be defined as the difference between the Selling Price and the Purchasing price of the asset. Divident is not considered when computing capital appreciation.

Taking the same example
Capital Appreciation = 12 - 10 = $2 i.e 20%

The required rate of return is defined as the return that you want from making a particular investment. It helps you make a decision if an investment is worth the cost. For example if an investor wants atleast 6% p.a then his required rate of return will be 6%. 2 different investors may have different required rate of return while making their investments and it varies on investor to investor basis.

An expected rate of return if an expectation of how much you can reasonably expect to make from that investment. It is different from different class of securities and has nothing in common with investor's requirement. It is dependent on the underlying and not on investor basis.