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Risk premium |
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Risk premium1. The higher expected return (in the sense of mathematical expected value) that an uncertain asset must pay in order for risk averse investors to be willing to hold it. 2. The difference between the interest rate on a risky asset and that on a safe one. 3. In exchange markets the difference between the forward rate and the expected future spot rate.Risk premiumThe reward for holding the risky equity market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.Risk premium Similar MatchesEquity risk premiumEquity risk premiumThe concept that justifies investment in stocks, where your capital is at risk, rather than gilt-edged bonds which are as safe an investment as you can get and where your capital is not at risk provided you hold the bond til maturity.The theory goes that it is only worth investing in stocks if the return you get exceeds the return you could get on gilts - otherwise, why would you take on the extra risk? The difference in returns is known as the equity risk premium.Every historical analysis of returns achieved by stocks compared to bonds shows that stocks outperform bonds in the long term. This is why you repeatedly hear pundits say that the stock market, while risky in the short term, is not risky in the long term. The key thing, as a private investor, is to leave your money in the market for long enough for the long term benefit to eradicate the short term risk. Stick your money in the market for two months, and it might go down 20% if you are unlucky. Stick it in a well-diversified portfolio for 30 years, and it should produce returns that comfortably exceed what you could have got from bonds. Term premiumsTerm premiumsExcess of the yields to maturity on long-term bonds over those of short-term bonds. Forward premiumForward premiumA currency trades at a forward premium when its forward price is higher than its spot price. Life assurance premium reliefLife assurance premium reliefA tax relief of 15% on the premiums paid into long-term insurance policies. Applies only to policies lasting for more than 10 years and issued before March 13, 1984. Single Premium Deferred Annuity (SPDA)Single Premium Deferred Annuity (SPDA)An IRA-like annuity into which an investor makes a lump-sum payment that is invested in either a fixed-return instrument or a variable-return portfolio, which is taxed only when distributions are taken. Further SuggestionsSingle premium life insuranceDefault premium Conversion premium premium Premium bond Tender offer premium Percentage premium waiver of premium premium bonds Unamortized premiums on investments Bond premium Call premium Insurance premium Option premium insurance premium Premium income Risk premium approach Forward premium Premium warrant premium High premium convertible debenture Waiver of premium Indemnity Guarantee Premium insurance premium tax single premium life insurance |
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