How does opportunity cost affect an investor’s required rate of return

How does opportunity cost affect an investor’s required rate of return?

What will be an ideal response?

ANSWER

An investor’s required rate of return can be defined as the minimum rate of return necessary to attract an investor to
purchase or hold a security. This definition considers the investor’s opportunity cost of funds of making an investment
in the next-best investment. This forgone return is an opportunity cost of undertaking the investment and,
consequently, is the investor’s required rate of return. In other words, we invest with the intention of achieving a rate
of return sufficient to warrant making the investment. The investment will be made only if the purchase price is low
enough relative to expected future cash flows to provide a rate of return greater than or equal to our required rate of
return.