Risk Premium
Private Credit glossary · Underwriting & Credit Analysis
Definition
Expected excess return for bearing non-diversifiable risk.
Risk Premium in plain English
A risk premium is the extra reward you demand for taking on a risk you can't easily cancel out. Safe things like government-backed savings pay a little; anything with a real chance of loss has to promise MORE than that to convince people to bother, and that "more" is the premium. It's like a friend offering you $5 to hold their steady, reliable dog for an hour versus $25 to hold their unpredictable, might-bite one, the extra $20 is your premium for the added danger. The "non-diversifiable" part means it's a risk you can't shrink just by spreading your money across many bets, because it hits everything at once (like a whole economy sinking), so investors won't take it for free.
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