What are the two components of the investor's required rate of return?

 The risk-free rate of return is the required rate of return, or discount rate, for riskless investments. Typically, our measure for the risk-free rate of return is the U.S. Treasury bill rate. The risk premium is the additional return we must expect to receive for assuming risk. As the level of risk increases, we will demand additional expected returns. Even though we may or may not actually receive this incremental return, we must have reason to expect it; otherwise, why expose ourselves to the chance of losing all or part of our money?