1.
what factors are considered when determining an appropriate rate of return? which factor is the
most significant? does this change over time?
Solution
The factors considered when determining the rate of the return is:
1. The asset mix - As to how much is invested in risky assets liky equity and what is the amount
of debt. So the total return depends on the asset mix. Equity investment given better return over a
longer time horizon
2.Fundamentals - The underlying fundamentals of the business affects the rate of return. For
example if the compnay invetsed is a commodity producer, then it is affected by the commodity
price reduction and hence will result in lower returns
3. State of the economy of the country- whether it is in a recession or a recovery mode.
The most important factor is the Asset - Mix. Yes, it does chnage over time. In the short term
equity make give flat to negative returns and over long term then tend to beat debt returns.