Risk Premium

Reviewed by Vineeth | Updated on Aug 26, 2020

Introduction

The risk premium is defined as the return in addition to the risk-free return that an investment is anticipated to deliver.

Understanding Risk Premium

The risk premium is a reward to those investors who are willing to bear a higher risk than investors who prefer risk-free returns. However, your decision to bear a higher risk might not yield you high returns.

Highlights of Risk Premium

  1. The risk premium is defined as the return, which is more than the risk-free return anticipated by an investment.

  2. This, in a way, is a form of rewarding investors willing to bear a higher risk.

  3. Your losses will be enhanced if the decision to take a higher risk backfires.