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.