What is the "normal rate of return"?

The "normal rate of return" refers to the typical rate of return that an investor can expect to earn from a type of investment—usually one that is comparable or similar to the specific investment in question. It serves as a benchmark that reflects the opportunity cost of investing capital elsewhere. In other words, it is the return that would practically be earned on an investment under average conditions given the market’s risks and opportunities.

When considering the economic environment, an investment should ideally earn at least this normal rate of return to be considered worthwhile; otherwise, it would indicate that resources might be better allocated to other investments with similar risk profiles that could yield higher returns. This concept helps investors evaluate whether the expected returns justify the risks associated with a particular investment.

In contrast, the other options focus on different financial metrics or concepts unrelated to the standard normative benchmark. For instance, one option leans towards the actual economic profits realized, while another talks about the returns in the context of their current use, which do not capture the normative expectation derived from comparing across investments. Therefore, the normal rate of return is best understood as the average return an investor might anticipate from a typical investment in a comparable category.