Risk Premium Calculator

Formula

The formula to calculate the Risk Premium (RP) is:

\[ \text{RP} = \text{R}_F - \text{R}_A \]

Where:

\(\text{RP}\) is the risk premium
\(\text{R}_F\) is the return on actual investment
\(\text{R}_A\) is the return on a risk-free asset

Risk Premium Definition

A risk premium is the difference in returns between a risk-free asset and another asset class or individual asset. It represents the additional return an investor expects to earn from holding a risky asset instead of a risk-free asset. The risk premium compensates investors for the additional risk they take on when investing in riskier assets.

Example Calculation

Let's assume the following values:

Return on Actual Investment (R_F) = 8%
Return on Risk-Free Asset (R_A) = 3%

Using the formula to calculate the Risk Premium:

\[ \text{RP} = 8 - 3 = 5\% \]

The Risk Premium is 5%.