Expected and Required Returns: Very Different Concepts

5 Pages Posted: 16 Apr 2015 Last revised: 2 Jun 2019

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Isabel Fernández Acín

University of Navarra - University of Navarra, Students

Date Written: May 28, 2019

Abstract

The expected return is different than the required return. We explain it for an investment project, for the valuation of a share of Coca-Cola and for the market risk premium.

However, there are many valuations that assume that the expected return is equal to the required return. Similarly, Expected Equity Premium (EEP) and Required Equity Premium (REP) are two very different concepts, although many books and financial literature do not distinguishing them. Both, the REP and the EEP differ for different investors.

The topic of this short paper (4 pages) is “thinking about valuation”: it is important to understand what we are doing.

Keywords: expected return, required return, required equity premium, expected equity premium, market risk premium

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo and Fernández Acín, Isabel, Expected and Required Returns: Very Different Concepts (May 28, 2019). Available at SSRN: https://ssrn.com/abstract=2591319

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

Isabel Fernández Acín

University of Navarra - University of Navarra, Students ( email )

Pamplona
Spain

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