In expected utility theory, the risk premium is the difference between expected wealth and its certainty equivalent: U(CE(W))=EU(W). For increasing concave utility functions it is nonnegative by the Jensen inequality. In financial asset pricing, risk premium also refers to expected return above a specified risk-free benchmark; the benchmark and whether the premium is monetary or proportional must therefore be stated.
Incoming links (5)
- Arbitrage pricing theory
- Past exam of the mathematics course of the University of Cambridge / 2001 / iii / Paper 23 / 2 / c / Solution
- Past exam of the mathematics course of the University of Cambridge / 2001 / iii / Paper 23 / 3 / b / Solution
- Past exam of the mathematics course of the University of Cambridge / 2002 / iii / Paper 32 / 1 / c / i / Solution
- Past exam of the mathematics course of the University of Cambridge / 2002 / iii / Paper 32 / 5 / Solution
Discussion (0)
New discussionThere are no discussions about this article yet.
Articles by others on the same topic (NaN)
The risk premium is the return in excess of the risk-free rate of return that investors require to compensate them for the additional risk associated with a particular investment. It reflects the general principle that higher risk should be associated with the potential for higher returns. In finance, the concept is often applied in different contexts: 1. **Equity Risk Premium**: This is the additional return expected from investing in the stock market over a risk-free investment, such as government bonds.