Required Yield
Categories: Investing, Managed Funds
How much would someone have to pay you to eat entire bushel of ghost peppers? How about to jump from a moving train? Or to try to ride a lion? What about a lion who just ate a bushel of ghost peppers?
When you do something risky, you have to get a consummate reward. You need to earn enough to justify the risk. That’s the idea behind a required yield.
The required yield is the amount of return that investors want to receive in order to take on a specific risk. The level is set by the market, and changes based on the risk level of the security.
Parking money in Treasury bonds, you will accept a relatively small return, since the investment is largely risk-free. Putting money into bonds issued by a company launching an Uber-like service offering rides to lions hopped up on ghost peppers? Probably need a much higher return.
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Finance: What is Hurdle Rate?62 Views
Finance allah shmoop shmoop what is ah hurdle rate Well
a hurdle rate refers to the investment return minimum that
an investment project requires for it to be worth taking
the risk and effort to do it in the first
place All right what does that really mean Well you're
the new ceo of baby's first chainsaw inc a project
manager present to you the opportunity to open a new
line of business called grand pas last chain saw going
into that business will cost you one hundred million box
of initial investment in large print labeling walker accessible attachments
jittery hand stabilizers and some extra denture cream You as
ceo are looking at eight other projects you can afford
to do on ly one and the best of the
eight other projects is a similar product called the unhinged
midlife crisis chainsaw which has been garnering a lot of
early interest That project has return rate of fourteen percent
so the project manager presenting grandpas last chainsaw now has
a hurdle rate that must be above the highest last
hurdle or fourteen percent fourteen percent annualized return got it
and that's as presented by the project manager pitching investment
in the mid life crisis model meaning they think it'll
return fourteen percent a year on the investment Got it
Whichever of those eight competitive project managers presents the most
believable projections for sales and profits that exceed the others
well they'll soon become king of the family chainsaw market
And the ones who don't well let's just say they 00:01:38.855 --> [endTime] use a few extra bodies over in product development