Risk premium
The extra return investors demand for holding something riskier than a safe asset such as a government bond.
In plain English
Investors generally want to be paid more for taking more risk. The risk premium is that extra reward, measured against a “safe” benchmark such as a UK government bond.
The “equity risk premium” is the extra return investors expect from shares compared with government bonds over the long run.
An everyday example
If a UK government bond yields 4% and a riskier company bond yields 7%, the extra 3% is the risk premium for lending to that company instead of the government.
Why it matters for investors
Risk premiums rise when investors feel nervous and fall when they feel confident. That shift in mood is one reason prices can move sharply even when nothing about a company itself has changed.
In the Knightsman Letters
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Related terms
Education only, not financial advice. Examples are simplified and use illustrative numbers.