Calculate risk premium, return on investment, or risk-free return by choosing the value to solve and entering the other two values.
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Risk Premium Formula
The risk premium is the extra return an investment is expected to earn above a risk-free asset. The calculator uses the main formula below.
- RP = risk premium, in percentage points
- ROI = return on investment, as a percent
- RFR = return on risk-free asset, as a percent
If you select Risk premium, the calculator subtracts the risk-free return from the investment return.
If you select Risk-free return, the calculator subtracts the risk premium from the investment return.
If you select Investment return, the calculator adds the risk premium to the risk-free return.
Use the same return format in every field. For example, enter 8 for 8%, not 0.08.
Illustrative Risk Premium Ranges
These illustrative breakpoints are not universal investment benchmarks or risk ratings. Actual premiums depend on the asset, period, currency and whether returns are expected or realized. Use matching return conventions and horizons.
| Risk premium | Basic interpretation | What it may suggest |
|---|---|---|
| Below 0 percentage points | Negative premium | The investment return is lower than the risk-free return. |
| 0 to 2 percentage points | Low premium | The investment offers little extra return for taking risk. |
| 2 to 6 percentage points | Moderate premium | The investment offers a clearer return above the risk-free rate. |
| Above 6 percentage points | High premium | The investment may involve higher uncertainty or higher expected reward. |
Risk-Free Return Reference Points
A risk-free benchmark is often modeled using a government security in the same currency and with a matching horizon. Government bonds can still carry interest-rate, inflation and other risks; a quoted yield is not a guaranteed realized return over a shorter holding period.
| Use case | Possible risk-free reference | Note |
|---|---|---|
| Short-term investment | Treasury bill yield | Often used for time frames under one year. |
| Medium-term investment | Intermediate government bond yield | Useful when the investment horizon is several years. |
| Long-term stock analysis | Long-term government bond yield | Common for equity risk premium comparisons. |
Example Problems
Example 1: Calculate risk premium
You have an investment return of 9% and a risk-free return of 4%.
The risk premium is 5 percentage points.
Example 2: Calculate return on investment
You know the risk premium is 6 percentage points and the risk-free return is 3%.
The return on investment is 9%.
FAQs
What does a risk premium tell you?
A risk premium tells you how much extra return an investment provides compared with a risk-free asset. If an investment returns 10% and the risk-free asset returns 4%, the risk premium is 6 percentage points. That 6 points is the added return for accepting investment risk.
Can a risk premium be negative?
Yes. A negative risk premium means the investment return is lower than the risk-free return. For example, if an investment returns 2% and the risk-free asset returns 5%, the risk premium is -3 percentage points.
Is risk premium the same as return on investment?
No. Return on investment is the total return from the investment. Risk premium is only the part of that return above the risk-free rate. For example, if the investment return is 8% and the risk-free return is 3%, the risk premium is 5 percentage points.
