The risk premium is the excess return investors demand for taking on additional risk over the risk-free rate. Equity risk premium = expected stock returns minus risk-free rate, historically averaging 4-6% for US stocks. Credit risk premium = corporate bond yields minus equivalent Treasury yields, averaging 1-2% for investment grade, 4-6% for high-yield. Risk premium varies by perceived risk — recessions widen risk premiums (investors demand more for risky assets); calm markets compress them. Stretched valuations (low risk premiums) often precede market corrections; wide premiums often precede strong returns. Equity risk premium is the bedrock of long-term wealth building.
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Risk Premium
August 22, 2026 · Aditya Gupta
Finance
Related terms
Bond Market
The bond market is the global market for debt securities — US Treasuries, corporate bonds, municipal bonds, mortgage-backed…
Bubble
An asset bubble is a sustained rise in asset prices well above fundamental value, driven by speculation rather…
Comparative Advantage
Comparative advantage is David Ricardo's foundational economic theory: countries should specialize in producing goods where they have the…
Consumer Price Index
The Consumer Price Index (CPI) is the most widely-cited inflation measure in the US — tracking price changes…
Cost of Capital
Cost of capital is the rate of return investors require to provide capital to a business — combining…
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