what is required rate of return rrr 
the required rate of return rrr is the minimum return an investor will accept for owning a company s stock as compensation for a given level of risk associated with holding the stock the rrr is also used in corporate finance to analyze the profitability of potential investment projects the rrr is also known as the hurdle rate which like rrr denotes the appropriate compensation needed for the level of risk present riskier projects usually have higher hurdle rates or rrrs than those that are less risky investopedia jessica olah2 methods to calculate the required rate of return rrr there are a couple of ways to calculate the required rate of return either using the dividend discount model ddm or the capital asset pricing model capm the choice of model used to calculate the rrr depends on the situation for which it is being used if an investor is considering buying equity shares in a company that pays dividends the dividend discount model is ideal a popular variation of the dividend discount model is also known as the gordon growth model the dividend discount model calculates the rrr for equity of a dividend paying stock by utilizing the current stock price the dividend payment per share and the forecasted dividend growth rate the formula is as follows rrr expected dividend payment share price forecasted dividend growth rateto calculate rrr using the dividend discount model another way to calculate rrr is to use the capital asset pricing model capm which is typically used by investors for stocks that do not pay dividends the capm model of calculating rrr uses the beta of an asset beta is the risk coefficient of the holding in other words beta attempts to measure the riskiness of a stock or investment over time stocks with betas greater than 1 are considered riskier than the overall market often represented by a benchmark equity index such as the s p 500 in the u s or the tsx composite in canada whereas stocks with betas less than 1 are considered less risky than the overall market the formula also uses the risk free rate of return which is typically the yield on short term u s treasury securities the final variable is the market rate of return which is typically the annual return of the s p 500 index the formula for rrr using the capm model is as follows rrr risk free rate of return beta x market rate of return risk free rate of return to calculate rrr using the capm 