Risk Premium
The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is a form of compensation for investors who tolerate the extra risk - compared to that of a risk-free asset - in a given investment. Investopedia Says:
Think of a risk premium as a form of hazard pay for your investments. Just as employees who work relatively dangerous jobs receive hazard pay as compensation for the risks they undertake, risky investments must provide an investor with the potential for larger returns to warrant the risks of the investment.
For example, high-quality corporate bonds issued by established corporations earning large profits have very little risk of default. Therefore, such bonds will pay a lower interest rate (or yield) than bonds issued by less-established companies with uncertain profitability and relatively higher default risk. Related Terms:
Default Risk
Earnings Yield
Eat Well, Sleep Well
Risk Discount
Risk Tolerance
Risk-Adjusted Return
Risk-Free Rate of Return
Risk-Free Rate Puzzle - RFRP
Risk-Return Tradeoff
Yield |