Hurdle Rate
The minimum required rate of return for making an investment. In other words, the investment needs to overcome the hurdle of a certain prescribed or agreed to rate of return, before the investor(s) agree to make the investment.Hurdle rate is a financial buzzword. you can nevertheless apply it to your own investments, big or small. For example, suppose you want to invest in the stock market. You want to invest in individual stocks, ETFs (exchange traded funds), mutual funds, or a combination thereof. Suppose you estimate that over the last 50 years, stock markets have yielded 8% per annum. Further suppose that you will evaluate your portfolio's performance every 10 years to see if it is beating the hurdle rate or not. Additionally suppose that you consider yourself to be a little better than the average mutual fund manager (read up our article in the markets section on FRANconomics.com to understand why most mutual fund managers never beat the stock market), and prescribe for yourself a hurdle rate of 2% more than the average stock market return of 8%. So, for you, the hurdle rate is 10%. You can change your strategies iteratively, as long as you are confident that you will be getting 10% rate of return per annum, after 10 years, and every year thereafter. If you see that at the end of 10 years, you have not achieved 10% return per annum, then your investment in stocks did not cross the hurdle rate!
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