Investor Glossary-risk premiumInvestor Glossary-risk premiumInvestor Glossary-risk premiumInvestor Glossary-risk premiumInsightful stock market charts - Click here
investor
Categories    # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Risk Premium

The HTML to link to this page
 

In finance, the risk premium is the additional return received or expected in exchange for the perceived risk of an investment above the risk-free interest rate. Even though the risk-free rate is a theoretical concept that can only be estimated, since it is a constant, the risk premium of two alternative investments can still be compared. Modern portfolio theory links the risk premium to the expected return on an investment in a number of models such as CAPM, or the Capital Asset Pricing Model. In debt markets, the risk premium is known as the credit spread. In equity markets, the risk premium is the total return from both dividends and appreciation, less the risk-rate. This equity risk premium is often called simply an equity premium. Whatever the risk premium, the rate of return going forwards is an expected rate of return. The higher the risk premium, the greater the uncertainty of actual return.



Rate this risk premium definition...

Learn about investing with the Investor Glossary Term of the Day


Click here for insightful stock market charts. Where is the market headed? The answer may surprise you. Find out
with the exclusive & Barron's recommended charts of Chart of the Day.


Popular Terms: reverse mortgage, diluted share, stock market close, VIX, option premium, 401a, per diem, labor relations, deferred tax, inflation, current ratio, EBITDA, limit order, APR, retained earnings, balance sheet, wholly-owned subsidiary, phantom income, 1031 exchange, average price per share, class C shares, LIBOR, deferred revenue, in escrow, command economy, quality assurance, real GDP, covered put, Zero Cost Collar, minority interest, open position, Key Rate Duration, margin rate, ex-dividend, cancelled check, FICO score, stock split, liquidity ratio, 1035 exchange, dividends payable, 144a, annual return, FTSE, debt service coverage, implied volatility, risk management, irrevocable trust, required rate of return, ex-dividend date


Accounting | Banking | Bonds | Brokers | Economy | Futures | Mutual Funds | Options | Real Estate | Retirement | Stocks | Taxes | Technical Analysis
Home | Term of the Day | Suggest a Term | Chart of the Day | Dogs of the Dow
©2004-2016 Investor Glossary - All rights reserved - Terms of Use