Listen to a Business English Dialogue About Required rate of return
Savannah: Hi Patrick, do you know what the required rate of return is in finance? I’ve heard it mentioned but I’m not exactly sure what it means.
Patrick: Hey Savannah, the required rate of return is the minimum return that an investor expects to receive from an investment to compensate for the level of risk they are taking. It’s often used to evaluate the attractiveness of an investment opportunity.
Savannah: Ah, I see. How is the required rate of return determined?
Patrick: The required rate of return is influenced by various factors such as the investor’s risk tolerance, prevailing interest rates, inflation expectations, and the specific characteristics of the investment itself.
Savannah: That makes sense. Can you give me an example of how the required rate of return works in practice?
Patrick: Sure, let’s say you’re considering investing in a stock. If you determine that the stock is riskier than average, you might require a higher rate of return to compensate for that risk. Conversely, if the stock is perceived as safer, you might accept a lower rate of return.
Savannah: Okay, I understand. How does the required rate of return relate to the concept of opportunity cost?
Patrick: The required rate of return is closely tied to opportunity cost because it represents the return that an investor could earn from an alternative investment with similar risk. By comparing the potential returns of different investments, investors can assess which one offers the best opportunity for achieving their financial goals.
Savannah: Got it. Is the required rate of return the same for every investor?
Patrick: No, the required rate of return varies from investor to investor based on their individual preferences, goals, and risk tolerance. Some investors may have a higher required rate of return due to a lower tolerance for risk, while others may be willing to accept a lower return in exchange for lower risk.
Savannah: Thanks for clarifying, Patrick. It’s interesting to learn how the required rate of return plays a crucial role in investment decision-making.
Patrick: You’re welcome, Savannah. Understanding the required rate of return is essential for investors to make informed decisions and evaluate the potential risks and rewards of different investment opportunities. If you have any more questions, feel free to ask!
