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


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