How is the expected rate of return defined in the constant growth model?

The correct choice defines the expected rate of return in the context of the constant growth model, also known as the Gordon Growth Model. This model is widely used in finance to determine the value of a stock based on its expected future dividends, which are assumed to grow at a constant rate.

In this model, the expected rate of return is calculated by adding the dividend yield to the capital gains yield. The dividend yield is derived from the expected dividends per share divided by the current price of the stock, while the capital gains yield reflects the anticipated growth rate of those dividends. Essentially, it posits that the total return an investor anticipates from holding a stock comes from these two components: the income generated through dividends and the appreciation of the stock price as the dividends grow over time.

This approach is particularly useful for valuing companies with stable and predictable growth patterns, as it lays out a clear method to derive expected returns based on known financial metrics rather than historical performance or subjective market assessments. The other options do not accurately describe the expected rate of return in the context of the model, as they focus on different perspectives or criteria unrelated to the formula used within the constant growth context.