An equity investor's required rate of return is influenced by the economy's real risk-free rate, the expected rate of inflation, and a risk premium.

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An equity investor's required rate of return is influenced by these factors. The real risk-free rate reflects the return that can be earned on an investment with no risk of default or inflation. The expected rate of inflation reflects the anticipated increase in prices over time, which erodes the purchasing power of money. The risk premium reflects the compensation an investor requires for taking on additional risk beyond the risk-free rate. All three of these factors are important in determining an investor's required rate of return.

An Equity Investor's Required Rate of Return Is Influenced by the Economy's