Risk premium
InvestingDefinition
Excess return investors demand for bearing a particular risk, above the risk-free rate. Equity risk premium: ~5-6% per year over 10Y Treasuries. Term premium: ~1-2%/yr in normal times. Credit spread: 1-5%/yr depending on rating.
Risk premia are time-varying. Some periods they're large (deep recessions, panics) and the smart move is to load up; other times they're small (late-cycle euphoria) and prudent to underweight.
Risk premia are time-varying. Some periods they're large (deep recessions, panics) and the smart move is to load up; other times they're small (late-cycle euphoria) and prudent to underweight.