Risk Premium

Risk Premium is the return more than the risk-free rate of return an investment is required to yield. An asset’s risk premium is a sort of compensation for buyers who tolerate the extra risk, in comparison with that of a new risk free asset, in the given investment. On an individual, a risk premium is the minimum sum of money by which this expected return using a risky asset should exceed the known return using a risk free asset as a way to induce an individual to hold the risky asset rather than the risk-free asset.