A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset, or the expected return on a less risky asset, in order to induce an individual to hold the risky asset rather than the risk-free asset. Thus it is the minimum willingness to accept compensation for the risk.
The certainty equivalent, a related concept, is the guaranteed amount of money that an individual would view as equally desirable as a risky asset.
Read more about Risk Premium: Formal Definitions, Example, Finance
Famous quotes containing the words risk and/or premium:
“Maybe we were the blind mechanics of disaster, but you don’t pin the guilt on the scientists that easily. You might as well pin it on M motherhood.... Every man who ever worked on this thing told you what would happen. The scientists signed petition after petition, but nobody listened. There was a choice. It was build the bombs and use them, or risk that the United States and the Soviet Union and the rest of us would find some way to go on living.”
—John Paxton (1911–1985)
“There is little premium in poetry in a world that thinks of Pound and Whitman as a weight and a sampler, not an Ezra, a Walt, a thing of beauty, a joy forever.”
—Anna Quindlen (b. 1952)