Risk Premium is the extra return an investor expects for taking higher risk compared to a risk-free investment.
Risk Premium compensates investors for the uncertainty and potential loss associated with risky investments like stocks, corporate bonds, or real estate.
It is the difference between the return on a risky asset and the risk-free rate (often based on government securities issued under the Reserve Bank of India).
👉 Risk Premium = Expected Return – Risk-Free Rate
"If a stock is expected to return 12% and risk-free rate is 6%: 👉 Risk Premium = 6%"