How to Determine the Required Rate of Return for Equity

by C. Taylor

A stock's required rate of return on equity calculates the expected return with respect to how risky the stock is as an investment. The riskiness of the stock is offered by its beta value, which compares it to the overall market. The market uses a beta value of 1, so any value greater than that is more risky and should offer a higher return to compensate for the added risk. The Capital Asset Pricing Model also factors in a risk-free alternative, which as Treasury bonds, which offer returns with little or no risk.

Look up the stock's beta value on any major financial website, such as google.com/finance, money.msn.com or cnbc.com. Also, look up the current market return.

Subtract the risk-free alternative rate from the overall market return. As an example, if you could invest in a 4-percent Treasury bond, which is considered a safe-bet, and the overall market offered an 8 percent return, then subtract 0.04 from 0.08 to get 0.04.

Multiply this figure by the stock's beta value. If the example stock had a beta value of 1.2, you would end up with 0.048.

Add the risk-free rate to calculate the required rate of return on equity. In the example, your stock would need to offer 0.088, or 8.8 percent, return on equity to be worth the risk associated with the stock.

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