๐ช๐ต๐ฎ๐ ๐ถ๐ ๐ฟ๐ถ๐๐ธ ๐ฝ๐ฟ๐ฒ๐บ๐ถ๐๐บ?
Risk Premium is the extra return an investor demands for taking on additional risk compared to a "risk-free" investment.
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๐ In Simple Words:
> Itโs the reward for risk.
For example:
A government bond might give you 3% (considered "risk-free").
A stock investment might offer 9%.
โก๏ธ The risk premium here is 9% โ 3% = 6%.
That extra 6% compensates you for the risk of price fluctuation, possible losses, etc.
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๐ก Why It Matters:
Helps compare safe vs risky investments.
Higher risk = Higher expected risk premium.
Used in models like CAPM to calculate expected returns.
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โ Types of Risk Premiums:
Type Example
Equity Risk Premium Stocks vs. Treasury bonds
Credit Risk Premium Corporate bonds vs. government bonds
Liquidity Premium Real estate vs. easily-sellable assets
Country Risk Premium Investing in a stable vs. volatile ๐ฐ๐ผ๐๐ป๐๐ฟ๐
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