Risk Premium

A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset, or the expected return on a less risky asset, in order to induce an individual to hold the risky asset rather than the risk-free asset. Thus it is the minimum willingness to accept compensation for the risk.

The certainty equivalent, a related concept, is the guaranteed amount of money that an individual would view as equally desirable as a risky asset.

Read more about Risk Premium:  Formal Definitions, Example, Finance

Other articles related to "risk premium, risk, premium":

Risk Premium - Finance
... In finance, the risk premium refers to the amount by which an asset's expected rate of return exceeds the risk-free interest rate ... When measuring risk, a common approach is to compare the risk-free return on T-bills and the risky return on other investments (using the ex post return as a ... This excess expected return is known as the risk premium ...
Net Present Value - Common Pitfalls
... Another common pitfall is to adjust for risk by adding a premium to the discount rate ... mean that this is a valid approach to adjusting a net present value for risk, although it can be a reasonable approximation in some specific cases ... may not work well can be seen from the following if some risk is incurred resulting in some losses, then a discount rate in the NPV will reduce the impact of such losses below their true ...
1994 Economic Crisis In Mexico - Precursors
... The country's risk premium was affected by an armed rebellion in Chiapas, causing investors to be wary of investing their money in an unstable region ... Gregory Mankiw explains the country-risk issues precipitating the crisis The EZLN's violent uprising in Chiapas in 1994 along with the assassination of presidential candidate Luis Donaldo Colosio ... reaction of investors to a higher perceived country risk premium and paid out dollars ...
Capital Asset Pricing Model - The Formula
... relation to expected return and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class ... The SML enables us to calculate the reward-to-risk ratio for any security in relation to that of the overall market ... the expected rate of return for any security is deflated by its beta coefficient, the reward-to-risk ratio for any individual security in the market is equal to the ...
Pavement Life-cycle Cost Analysis
1998, the United States Department of Transportation (DoT) introduced risk analysis, a probabilistic approach to account for the uncertainty of the ... of the approaches of Net Present Value (NPV) analysis is to incorporate an inflation premium and a project risk premium into the discount rate (i) ... (i) = risk free rate + risk premium of the project + risk premium of inflation ...

Famous quotes containing the words premium and/or risk:

    In taking out an insurance policy one pays for it in dollars and cents, always at liberty to discontinue payments. If, however, woman’s premium is a husband, she pays for it with her name, her privacy, her self-respect, her very life, “until death doth part.”
    Emma Goldman (1869–1940)

    Any time you take a chance you better be sure the rewards are worth the risk because they can put you away just as fast for a ten dollar heist as they can for a million dollar job.
    Stanley Kubrick (b. 1928)