Investors’ Required Rate of Return

Required rate of return
= (1+ RFR) (1+ Inflation rate) (1+Risk premium)
=(Real RFR + Expected inflation) + Risk premium.
= Nominal RFR + Risk premium
= Nominal RFR + Beta x (Market return - Nominal RFR)

The risk premium include:
Internal risk
· business risk
· financial risk
· liquidity risk
· exchange rate risk
· country risk

External risk
· market risk factors, macroeconomic in nature and not diversifiable)