 There are certain factors that can affect the required rate of return for an investor. So an investor is required to consider these factors in order to ensure it's his required rate of return inconsistent with the factors that affect this required rate of return. By required rate of return we means the minimum rate of return that can be expected and accepted by an investor in order to get himself compensated for foregoing his personal consumption at the current level in order to have more consumption in the future. This required rate of return is the sum of three factors. The first is the time value of money during the period of investment. Second is the expected rate of inflation that may happen during the period of investment. And third is the risk involved in owing that particular investment. The analysis and estimation of the required rate of return are basically a complicated because of the market behavior that may change over time because wide range of rates are available on different alternative investment at any time during the investment period. Also the rates of return on a particular asset may change dramatically over the time horizon of the investment. And different rates are available on different assets and that may change during the investment time period. Again there is an important thing that differences in yields on the assets may result from the individual investment's riskiness. Real risk free rate of interest or RRFR in fact it is the basic interest rate that assumes that assumes no inflation and no uncertainty about future cash flows associated with the particular investment. This real risk free rate is the price that is charged for the risk free exchange between the current and future consumption of goods. In inflation free economy the investor generally demands the risk free rate of interest. The influence of risk free rate of interest on exchange price can be seen from two aspects. The first is a subjective factor and the second is the objective factor. Subjective factor state that the time preference of individuals for the consumption of income this determines the level of risk free rate of interest. And the objective factor is the set of investment opportunities that are available in the economy for any particular investor. There are certain factors that can influence the nominal risk free rate of interest. In fact investor foregoes his current consumption in order to have more consumption in the future. But that foregone is at the real risk free rate of interest. Investor demands real free rate of interest in order to have more consumption in the future. Then the consumption in the past at a price that had cost to have a past consumption. This means that investor desires to have more consumption in the future than the past at the cost that he had incurred in the past. So we have two types of interest rate here. First is the real rate of interest and then the second is the nominal interest rate. In fact the real rate of interest is adjusted for the price changes or the general price changes and the nominal rate of interest is generally stated in money terms. And nominal risk free rate is then determined by certain factors. The first is the real interest rate. The second is the expected inflation rate and then third is the money environment monetary environment in the capital market. The variables that determine real risk free rate that variables vary slowly or gradually. They change gradually in the long run period. And that change occurs alongside the long run real growth in the economy. So we can say that all those variables that affect real rate of interest. These variables change gradually as the real growth in the economy goes gradually. Investors sees t-bills as the risk free investment because the government has the power to collect taxes as per demand and the government also has the power to print currency notes in order to pay off its all liabilities. That is the reason the securities printed by the government are perceived as the risk free investments. This means that rates on t-bills can also be expected to change gradually. Therefore we can say that nominal interest rate on any risk free investment if not stable over the longer or shorter period. Even then the real risk free rates underlying variables will be stable over the longer period and they will be changed gradually as the real growth in the economy goes gradually. Conditions in the capital markets also affect the nominal risk free rate. We know that capital market is a place that bring investor borrower and the lender closer to each other. The cost of funds that is the interest in fact is the price that equates the current supply of savings and the demand for capital in terms of borrowings. This means that at a particular interest rate the savings and borrows may get equal to each other and that creates an equilibrium level between the supply of funds in terms of savings and the demand for funds in terms of borrowings. Any change in the relative easiness and tightness in the market can change the market as a whole but that change will be termed as a short-term phenomenon that has been caused by some temporary changes in the capital market but the capital market may change as the interest rate changes. It is the interest rate that can disturb the long-run market equilibrium like if the central bank in a country changes its discount rate and that change in the discount rate will change the equilibrium in the market but that change will happen in the longer run. This discussion concludes that long-run equilibrium of the capital market is linked with the long-run growth rate in the economy. The second factor is the expected rate of inflation. In fact, investors in the market require compensation against expected inflation that may occur in the economy in the future. So we can see that the investors nominal required rate of return on any risk-free investment is basically the product of the real risk-free rate of return and the expected level of inflation. Here we can also say that nominal interest rate on any risk-free investment is primarily not a good estimate to determine real risk-free rate because real risk-free rate can be changed in the short run as a response to changes in the capital market or the expected inflation rate. The third factor that can affect the investors expected rate of return is the risk premium. We know that return on the most investments are subject to uncertainty as to the timing and amounts of the future cash flows associated with the particular investment. So the investors require risk premium which is an amount in addition to the nominal risk-free rate on any investment that is expected to have some certainty for its expected returns. There are certain sources that can yield this riskiness and these sources may include the business risk which is basically the uncertainty of the income that flows from the operations of the business. Second is the financial risk that occurs when a firm uses fixed cost in its operations by using fixed cost mean that when a firm uses debt to finance its operations its equity goes on some riskier level and in the market the investor sees this firm as some riskiness. Liquidity risk by liquidity risk we means that the uncertainty about an investment in order to convert this into cash. So if an investment has some difficulty in liquidation in the market this is the liquidity risk that is attached to the investment then there is an exchange rate risk if the value of investment is in the denomination of some foreign country and any exchange rate change happens in the host country may create a riskiness for that particular investment. Second country risk any uncertainty of returns that may be caused due to political instability or other environment like economic environment in the country. So any change in the political setup or any other environmental changes in the country which may be economic or some other force that can have a certain level of riskiness that certain level of riskiness for a particular investment with reference to the expected rate of return associated for that particular investment. So we can say that the risk premium on any investment is subject to business risk, financial risk, liquidity risk, economic risk, exchange rate risk and the country risk.