What is the Risk Premium?

Main Conclusions

The risk premium is basically the extra return you expect when you choose an investment that is riskier than simply keeping your money in a safer place.

There are different types of risk premiums depending on factors such as market volatility, the possibility of a borrower defaulting (default risk), or how difficult it is to sell an asset (liquidity).

Understanding risk premiums can help investors determine which investments might be worth it, depending on their investment style and risk profile.

Introduction

Investing is about trying to achieve a good return without taking on more risk than you can handle. Some assets are considered safer than others, such as government bonds or gold. On the other hand, investing in things like stocks, cryptocurrencies, or real estate generally means accepting greater risks.

The risk premium is a useful concept that helps guide investors as they look for ways to grow their money while keeping an eye on potential risks.

Risk Premium Explained

When you put your money into riskier options, there is a natural expectation of better returns. That little extra part you expect to earn, compared to a safe investment, is what we call the risk premium. It is basically the difference between what you expect to earn from a risky investment and what you could earn from a safe one.

For example, in the U.S., government Treasury bonds are considered safe because the chances of a government defaulting are low. If you choose to invest in something less predictable, you want to be paid more for taking on that risk. The difference in potential returns between the safe bet and the riskier option is the risk premium..#Squar2earn #Write2Earn #EEUU #TRUMP