So are these two the same thing?? Schweser Book 3 Page 171 “The required rate of return is the return necessary to compensate the investor for taking on the systematic risk of holding the asset. The expected rate of return is the return the investor expects t earn given forecasts of future dividends and the terminal value.”
think expected return as “desired return” and required return as the return calculated using CAPM
Think of expected return as the analyst’s estimate Required return would be the rate of return required given the risk characteristics of the investment.
They are the same in efficient markets with identically-minded and situated investors. They are often used interchangeably, but sometimes the distinction is important (i.e. when seeking alpha), so watch the context.
required = capm = what I need to get PAID for assuming risk (assume 10%) expected = my forecast based on models or whatever else (assume 15%) Positive alpha of 5%.
Think of it also in terms of the SML. Overpriced stocks will plot below the SML and underpriced stocks will plot above.