A “risk premium” is the additional expected return investors require as compensation for bearing risk relative to a safer benchmark. The specific premium depends on the asset and risk being measured, and many risk premiums are estimated rather than directly observed.
ReviewedEvidence1 sourceSectionPhrases & Idioms
Quick answer
A risk premium is the extra expected return investors require for holding a risky asset instead of a safer or risk-free benchmark.
Key details
Canonical Formrisk premium
Core MeaningA risk premium is the extra expected return investors require for holding a risky asset instead of a safer or risk-free benchmark.
Further guidance
History Boundary
Current authoritative financial meaning is published without claiming an exact inventor, coinage date, or absolute first use.
Meaning
A risk premium is the extra expected return investors require for holding a risky asset instead of a safer or risk-free benchmark.
Usage Boundary
Risk premiums vary by asset, risk type, horizon, model, and market conditions; they are not one fixed percentage that applies to every investment.
Sources and evidence
Sources are shown with the role they play in this guide. Historical or style-sensitive claims are kept within the evidence boundary described above.
The Federal Reserve measure called the excess bond premium is the residual component of corporate bond spreads after accounting for expected default losses and is used as a gauge of bond-investor risk sentiment. This is a model-based Federal Reserve measure, not a synonym for the entire credit spread and not a universally fixed formula across all research settings.
A “liquidity premium” compensates investors for lower market liquidity. The St. Louis Fed illustrates it with a liquidity spread between assets matched on maturity and safety but differing in liquidity.
Liquidity risk is the risk that liquidity becomes impaired when an asset must be traded or funding needs must be met; authoritative frameworks distinguish market-liquidity risk from funding-liquidity risk. Use the broad label with care: market-liquidity risk concerns difficulty exiting or offsetting positions near market prices, while funding-liquidity risk concerns meeting cash-flow and collateral needs.
In financial-market analysis, “risk appetite” describes investors’ willingness to bear risk for potential return. Bank of England research explicitly distinguishes market risk appetite from risk aversion, so the term should not be treated as a simple synonym for low perceived risk.
In finance, “risk aversion” describes a preference against bearing uncertain risk without adequate compensation. Bank of England research distinguishes it from the broader market concept of risk appetite, so the two labels should not be collapsed into one measure.
“Risk tolerance” concerns how much investment loss or uncertainty an investor can and is willing to accept for the possibility of higher returns. It is an investor-level concept, not a synonym for a market-wide risk-on or risk-off regime.
“Risk-off” describes a market phase in which investors become more risk-averse and tend to shift toward safer or more liquid assets. The label describes broad sentiment and positioning rather than a guaranteed move in every asset class, and which assets act as havens can vary by episode.
“Risk-on” describes a market phase in which investors are more willing to take risk and riskier assets tend to be favored. The label describes broad risk appetite and cross-asset behavior, not a rule that every risky asset must rise or every safer asset must fall.
