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:
“The Englishman’s strong point is his vigorous insularity; that of the American his power of adaptation. Each of these attitudes has its perils. The Englishman stands firmly on his feet, but he who merely does this never advances. The American’s disposition is to step forward even at the risk of a fall.”
—Thomas Wentworth Higginson (1823–1911)
“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)