Discount Rates, Required Return, and Risk Premia

These pages group the rates analysts use to turn future cash flows into present value and compare return requirements across investments.

In this section

• CAPM, Risk-Free Rates, and Market Premia
  CAPM, risk-free-rate, and market-risk-premium terms used in required-return estimation.
  • Capital Asset Pricing Model
    Learn what the capital asset pricing model is, how it links expected return to systematic risk, and why beta matters in equity valuation.
  • Market Risk Premium: The Extra Return Investors Demand for Bearing Market Risk
    Learn what the market risk premium is, how it is used in CAPM and valuation, and why it matters for required return.
  • Risk-Free Rate: The Baseline Return Used Across Finance
    Learn what the risk-free rate means, why Treasury yields are often used as a proxy, and how the rate affects valuation, portfolio theory, and discount rates.
• Discount Rate Testing and Hurdle Inputs
  Discount-rate and test-rate terms used in valuation, impairment, and project analysis.
  • Discount Rate: The Return Used to Translate Future Cash Into Present Value
    Learn what a discount rate represents, how it affects valuation, and why choosing the right rate matters so much in finance.
  • Test Discount Rate: Real Rate of Return in Cost-Benefit Analysis
    The real rate of return used in cost-benefit analysis by the UK government, typically at a standard rate of 3.5% per annum, with adjustments for long-term scenarios.
• Nominal, Real, and Required Return Rates
  Nominal, real, fair, pretax, annualized, and required-return terms used in valuation.
  • Annualized Rate of Return: Converting Multi-Period Performance Into a Per-Year Return
    Learn what annualized rate of return means, how it differs from a simple total return, and why annualization makes investment comparisons fairer.
  • Fair Rate of Return
    Learn what a fair rate of return means as a reasonable return given risk, capital employed, and market conditions, especially in regulated or benchmarked settings.
  • Nominal Rate of Return: Return Before Adjusting for Inflation
    Learn what nominal rate of return means, why inflation matters, and how nominal return differs from real, annualized, and gross return measures.
  • Pretax Rate of Return: Investment Performance Before Taxes
    Learn what pretax rate of return measures, how to calculate it, why investors use it, and where pretax comparisons can mislead after-tax decision-making.
  • Real Rate of Return
    Learn what the real rate of return is and how it adjusts nominal investment performance for inflation.
  • Required Rate of Return: The Minimum Return an Investor Demands
    Learn what the required rate of return means, how it is estimated, and why it matters in valuation, capital budgeting, and portfolio decisions.