Risk Premium

Posted in Finance, Accounting and Economics Terms, Total Reads: 833

Definition: Risk Premium

Risk premium is the return which an investor receives on excess of risk free return as a compensation of taking additional risk.

Rate of return of T-bills are considered as Risk free return as there is no risk involved in T-bills as they are protected by government promise. When an investor buys a bond or share of a company, there are different kinds of risk involved in the investment. For e.g default risk, liquidity risk etc. So investors expect additional return for these risks. This additional return is known as risk premium.


T-bill rate of return is 5% per annum. Company A issues a share which is giving return of 12% per annum.

Risk premium for a person who buys company A share = (12 – 5) % = 7%


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