# Risk Premium Calculator

This tool is used to calculate risk premium of the market and risk premium on a stock using CAPM based on return on a given investment, return on a risk-free investment and market risk.

# Results

## Formula To Calculate Risk Premium :

This is also referred as default risk premium, is the return on an investment minus the return on a risk free investment.

**Risk Premium = Return from an investment - Return on a risk free investment**

## Formula To Calculate Risk Premium on a Stock Using CAPM :

It describes the relationship between risk and expected return and that is used in the pricing of risky securities.

**Cost of Common Stock = Return on a risk free investment + β(Return from an investment - Return on a risk free investment)**

Where,

Cost of Common Stock - is the investors required rate of return or expected return.

Risk Free Rate - is the return a no-risk investment would give. (Example- T-bills or US Government Bonds)

Beta(β) - measures systematic risk compared to the market.

Return on the market - is what the general stock market is expected to gain.

Risk Premium - is sometimes called the Equity Risk Premium or Market Risk Premium or Default Risk Premium.

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