The subjective approach to determining a required rate of return for a stock includes
I. the rate of return on a long-term bond.
II. a risk premium for the perceived business risk of the asset.
III. a risk premium for assuming the risk of the market.
IV. the desired rate of return of the individual investor.
A) I and III only
B) II and IV only
C) I, II and IV only
D) I, II and III only

Question

Quizplus · Accepted Answer

The subjective approach to determining a required rate of return for a stock includes the rate of return on a long-term bond (I) as a starting point, and then adding a risk premium for the perceived business risk of the asset (II) and a risk premium for assuming the risk of the market (III). Finally, the desired rate of return of the individual investor (IV) is factored in. All four factors are considered in determining the subjective required rate of return for a stock.

The Subjective Approach to Determining a Required Rate of Return