The formula to calculate the Risk Premium (RP) is:
RP=ROI−Rfreturn
Where:
Risk Premium is the return in excess of the risk-free rate of return investment is expected to yield.
Return on Investment (ROI) is the ratio of a profit or loss made in a fiscal year expressed in terms of an investment.
Risk Free Return is the theoretical rate of return attributed to an investment with zero risk.
Let's assume the following values:
Using the formula:
RP=ROI−Rfreturn
Evaluating:
RP=50000−12
The Risk Premium is 49988.
| Return on Investment | Risk Free Return | Risk Premium |
|---|---|---|
| 40000 | 12 | 39,988.00 |
| 50000 | 12 | 49,988.00 |
| 60000 | 12 | 59,988.00 |