Measure the excess return an asset delivers over the risk-free rate.
The risk premium is the whole reason for holding a risky asset. Dividing it by volatility converts it into a per-unit-of-risk figure, which is what makes assets with different volatilities comparable. A risk premium that does not compensate for volatility is a poor trade regardless of the absolute return achieved.
Risk Premium
Risk premium = asset return − risk-free rate
Risk premium = asset return − risk-free rate The risk premium is the whole reason for holding a risky asset. Dividing it by volatility converts it into a per-unit-of-risk figure, which is what makes assets with different volatilities comparable.
A risk premium that does not compensate for volatility is a poor trade regardless of the absolute return achieved.
This calculator takes 4 inputs: Asset or portfolio return, Risk-free rate, Inflation rate, Asset volatility. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.