Risk premium
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The excess expected return demanded by investors as compensation for bearing risk over the risk-free rate.
Risk premium in plain English
A risk premium is the extra reward investors insist on before they'll put money into something that might disappoint them. Think of two summer jobs: one pays a guaranteed $15 an hour, the other pays $15 plus a bonus that MIGHT be big or might be nothing — you'd only take the risky one if the possible upside were clearly higher, and that 'clearly higher' part is the risk premium. In investing it's the expected return above the safe rate that compensates you for the chance of losing money. The riskier the bet, the bigger the premium investors demand.
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