What is the difference between expected return and required return?

Question

I'm working problems for my finance class and I am having problems distinguishing between these two concepts. Could someone give me the scoop, so I can understand what my professor wants?

Thanks

Answer 1

Required return is the amount that you would need in order to get you to put your money into that investment.  Its an opportunity cost.  If you could put extra money toward your mortgage that had an interest rate of 7 then 7 percent or more would be the required return that you would need on an alternative investment in order to get you to invest in the alternative.

Expected return is the  weighted average of all probable  outcomes for that investment.  Its the most likely return you would expect from an investment based on its risk.  But its not guaranteed.

If the expected return is equal to or more than your required return then you would invest.

Answer 2

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Answer 3

Required return is what you would need to achieve a specific goal.  Such as retirement with $500,000.

Expected return is what you anticipate receiving on your investment.  

Comparing the two tells you whether or not you will meet your goal.