A risk premium is the amount of additional return needed by an individual to make up for being exposed to a higher risk level. It is frequently used in finance and economics, with the predicted hazardous return less the risk-free return serving as its generic definition.
The difference between the return on an investment and the return on a risk-free investment is the risk premium.
Risk premium calculated by the market equals 06315*6.9+0.3685*9.5, or 7.8581; likelihood of security equals 6/9.5, or 0.6315 = 0.3685
The average market return less the risk-free rate equals the market risk premium. The term "market" for shares can refer to an index of all stocks. Simply put, an investor needs a higher return on their investment to make it worthwhile the more risky the investment is.
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