Risk Premium Calculator

Measure the excess return an asset delivers over the risk-free rate.

About Risk Premium Calculator

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.

Formula

Risk Premium

Risk premium = asset return − risk-free rate

premium per unit risk: Risk premium divided by volatility, effectively a Sharpe ratio

Worked example

With the default values below, Risk Premium Calculator returns Risk Premium of 7.000%. Change any input above and every figure here is recalculated in your browser.

Inputs used

Asset or portfolio returnaccepts 0–100 %: 11 %
Risk-free rateaccepts 0–100 %: 4 %
Inflation rateaccepts 0–100 %: 2.5 %
Asset volatilityaccepts 0–100 %: 15 %

Results

Risk Premium: 7.000%
Real Risk Premium After Inflation: 6.829%
Premium per Unit of Volatility: 0.4667
Real Asset Return: 8.293%
Interpretation: Positive but modest compensation for risk

Step by step

1Values used
2Risk Premium
3Risk Premium= 7.000
4Real Risk Premium After Inflation= 6.829
5Premium per Unit of Volatility= 0.4667
6Real Asset Return= 8.293
7Interpretation= Positive but modest compensation for risk

Assumptions and limits

The result is derived only from the 4 inputs listed above. Anything not among them is not part of the calculation.
In particular, this calculator does not take tax, fees or charges or compounding frequency into account.
Figures are rounded for display to 4 decimal places, so totals built from several rounded parts can differ slightly from the unrounded arithmetic.
This is an estimate for general information and not professional financial, tax or legal advice. See the full disclaimer for the limits that apply to this kind of calculator.

How these calculators are built and tested is described on the Methodology page. If a figure looks wrong, please report it.

Frequently Asked Questions

How is Risk Premium calculated?

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.

Why does Risk Premium matter?

A risk premium that does not compensate for volatility is a poor trade regardless of the absolute return achieved.

What values do I need to enter?

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.