Risk Premium Calculator
Calculate risk premium to determine the additional return required for taking investment risk and make informed investment decisions.
Calculate Risk Premium
Results
Risk Premium
0.00%
Additional return for risk
Risk Analysis
Expected Return:
0.00%
Risk-Free Rate:
0.00%
Risk Level:
-
Sharpe Ratio:
-
Interpretation
Enter values to see risk analysis and investment recommendations.
Risk-Return Analysis
Understanding Risk Premium
Risk premium is the additional return an investor expects to receive for taking on additional risk compared to a risk-free investment. It's a fundamental concept in finance that helps investors evaluate whether the potential return justifies the risk taken.
Risk Premium Formula
Risk Premium = Expected Return - Risk-Free Rate
Or using CAPM: Risk Premium = β × (Market Return - Risk-Free Rate)
Types of Risk Premium
- Equity Risk Premium: Additional return for investing in stocks vs. bonds
- Credit Risk Premium: Extra yield for default risk in bonds
- Liquidity Risk Premium: Compensation for illiquid investments
- Maturity Risk Premium: Extra return for longer-term investments
- Country Risk Premium: Additional return for investing in foreign markets
Tips for Risk Premium Analysis
- Use Current Data: Ensure risk-free rates and market returns reflect current conditions
- Consider Time Horizon: Risk premiums vary with investment time frames
- Diversification Impact: Portfolio diversification can reduce required risk premiums
- Market Conditions: Risk premiums change with market volatility and economic conditions
- Historical Context: Compare current premiums with historical averages
Investment Applications
- Portfolio Construction: Balance risk and return across asset classes
- Asset Valuation: Determine fair value using appropriate discount rates
- Performance Evaluation: Assess whether returns justify risks taken
- Capital Budgeting: Evaluate project returns against required risk premiums
Risk Assessment Guidelines
- Low Risk (0-3%): Conservative investments, government bonds
- Moderate Risk (3-8%): Balanced portfolios, blue-chip stocks
- High Risk (8%+): Growth stocks, emerging markets, alternatives