What is Risk Premium?
A risk premium is an additional amount an investor gets in excess of a risk-free asset in other to persuade the investor for the extra risk taken.
Risk Premium Breakdown
Imagine a scenario where an investor should get a 20% profit on his investment usually, but then decides to take a risk which could potentially increase the profit to 30% of the investment, The 10% increase in profit is the Risk Premium. Therefore the minimum amount which he gets extra for taking the risk is whats called the RISK PREMIUM.
How To Calculate Risk Premium
Risk Premium can be calculated by subtracting the return to be earned on a risk-free investment from the return on an investment.