Applied International Finance

CHAPTER 5

Global Risk and Return

Because 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 investor’s required rate of return for the investment. Given the risk taken, the investor makes a good investment if he expects a higher rate of return than the required rate of return.

Finance theory thinks in terms of an investment’s aggregate required rate of return, meaning the “market’s” required rate of return for the investment, which is sometimes called the investment’s opportunity cost of capital, or more ...