Risk Premium

AAA

DEFINITION of 'Risk Premium'

The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is a form of compensation for investors who tolerate the extra risk - compared to that of a risk-free asset - in a given investment.

INVESTOPEDIA EXPLAINS 'Risk Premium'

Think of a risk premium as a form of hazard pay for your investments. Just as employees who work relatively dangerous jobs receive hazard pay as compensation for the risks they undertake, risky investments must provide an investor with the potential for larger returns to warrant the risks of the investment.

For example, high-quality corporate bonds issued by established corporations earning large profits have very little risk of default. Therefore, such bonds will pay a lower interest rate (or yield) than bonds issued by less-established companies with uncertain profitability and relatively higher default risk.

RELATED TERMS
  1. At A Premium

    The sale of an asset or item at a price significantly above the ...
  2. Risk Tolerance

    The degree of variability in investment returns that an individual ...
  3. Risk Management

    The process of identification, analysis and either acceptance ...
  4. Risk Discount

    A situation where a particular investor, either an individual ...
  5. Risk-Free Rate Puzzle - RFRP

    An anomaly in the difference between the lower historic real ...
  6. Earnings Yield

    The earnings per share for the most recent 12-month period divided ...
Related Articles
  1. Projected Returns: Honing The Craft
    Retirement

    Projected Returns: Honing The Craft

  2. How Interest Rates Affect The Stock ...
    Investing Basics

    How Interest Rates Affect The Stock ...

  3. The Impact Of An Inverted Yield Curve
    Bonds & Fixed Income

    The Impact Of An Inverted Yield Curve

  4. The Bond Market: A Look Back
    Mutual Funds & ETFs

    The Bond Market: A Look Back

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center