what is the concept of "required return"?

Answer 1

Before 1953 Shares of companies were priced randomly through supply and demand. Then Prof. Markowitz a student at Un. Chicago formulated that stock returns should reflect the risk involved in holding them. He came out with the famous Capital Asset Pricing Model where the required rate of return is calculated based on risk factors.
It is , ks=krf+beta(km-krf) where, krf is the risk free return or discount rate or short term t bill rate, beta is the percentate movement of stock to percentage movement of the market index, km is the return on market portfolio. Beta calculation is little complicated. It is the Covariand of Market return to Company return divided by Market return squared. It is again not that simple as stated. In practice it is calculated with surrogates the return on investment of a company for the past 15 years which is the surrogate for the company return and the price of the company for the past 15 years which is the market return. When this is substituted in the covariance equation given above you get beta and when all these are substitued in the other equation you get the required rate of return. This required rate is the return a company should provide to its stock holders for the risk they undertake to carry the stock.