hi, queston 1) I know that the component of the required return are market averages. (Coursenote-ch22-page2-line15) So, when some people are valuing the same asset, will they all use the same rate of required return? Ie, just use the market average? For example, all investors say the required return for asset A = 4% question 2) Will the expected return for an asset vary from investor to investor? For example, investor A says the expected return for asset A = 3%, investor A says the expected return for asset A = 5%, etc.
Whether we use market averages or our own estimates for the components of required and expected return depends on the purpose of the calcualtion. If an investor wants to decide whether an investment is good value then he will use his own estimates of required and expected return. He will buy assets for which his required return is lower than his estimate of expected return. Different investors will have different values for both the required and expected returns (although gross redemption yield on bonds and the initial running yield on other assets is known). However, we can also use the required and expected return equations to help explain movements in market values. For this purpose we should use market averages for each component of the equations. Market prices would drop if the required return was more than the expected return. Best wishes Mark
