As the future value of an investment is usually uncertain, an investor needs to think in terms of an expected rate of return. The investor has a target expected rate of return that will compensate for the risk specific to the investment. That target expected rate of return is sometimes called the required rate of return for the investment. Given the risk taken, an investor makes a sound investment if the actual expected rate of return exceeds the required rate of return.
Finance models are often cast in terms of an investment’s aggregate required rate of return, meaning the “market’s” required rate of return. This is sometimes called the opportunity cost of capital, or simply the investment’s cost of capital
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