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A risk premium is the minimum difference between the expected value of an uncertain bet that a person is willing to take and the certain value that he is indifferent to. Black Entertainment Television (BET for short) is the first television network geared towards African-Americans. ...
Example Suppose a game show participant may choose one of two doors, one that hides $1,000 and one that hides $0. Further suppose that the host also allows the contestant to take $500 instead of choosing a door. All three options (door 1, door 2, or take $500) have the same expected value of $500, so there is no risk premium for choosing the doors over the guaranteed $500. This article is about the television genre. ...
A contestant unconcerned about risk is indifferent to these choices. However, a risk averse contestant may be more likely to choose no door and accept the guaranteed $500. Risk aversion is a concept in economics and finance theory explaining the behaviour of consumers and investors under uncertainty. ...
If too many contestants are risk averse, the game show may encourage selection of the riskier choices (door 1 or door 2) by creating a risk premium. If the game show offers $2,000 behind the good door, increasing to $1,000 the expected value of choosing doors 1 or 2, the risk premium becomes $500 (i.e., $1,000 expected value - $500 guaranteed amount). Contestants with a minimum acceptable rate of return of $500 or more will likely choose a door instead of accepting the guaranteed $500. To meet Wikipedias quality standards, this article or section may require cleanup. ...
Finance In finance, the risk premium can be the expected rate of return above the risk-free interest rate. When measuring risk, a common sense approach is to compare the virtually risk-free return on T-bills and the very risky return on other investments. The difference between these two returns can be interpreted as a measure of the excess return on the average risky asset. This excess return is known as the risk premium. Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ...
The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no risk. ...
- Debt: In terms of bonds it usually refers to the credit spread (the difference between the bond interest rate and the risk-free rate).
- Equity: In the equity market it is the returns of a company stock, a group of company stock, or all stock market company stock, minus the risk-free rate. The return from equity is the dividend yield and capital gains. The risk premium for equities is also called the equity premium.
The white paper Equity Risk Premium: Expectations Great and Small notes that “it is dangerous to engage in simplistic analyses of historical ERPs to generate ex ante forecasts that differ from the realized mean.” Standard & Poor’s states “the most correct method is to use an arithmetic average of historical returns.” In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ...
Credit spread is the difference in yield between different securities due to different credit quality. ...
A stock market is a market for the trading of publicly held company stock and associated financial instruments (including stock options, convertibles and stock index futures). ...
The dividend yield on a company stock is the companys annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. ...
In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ...
The equity premium puzzle refers to the phenomenon that observed returns on stocks over the past century are higher, by approximately 6%, than returns on government bonds. ...
If a return represents several periods of growth, use the geometric mean of the periods.
See also Interest is the rent paid to borrow money. ...
For other uses, see Risk (disambiguation). ...
To meet Wikipedias quality standards, this article or section may require cleanup. ...
External links - Risk Management Magazine
- Hussman Funds - Estimating the Long-Term Return on Stocks - June 1998
- equity risk premium and information quality
- Ruben D. Cohen (2002) “The Relationship Between the Equity Risk Premium, Duration and Dividend Yield [download],” Wilmott Magazine, pp 84-97, November issue.
- Ruben D. Cohen “The Long-run Behaviour of the S&P Composite Price Index and its Risk Premium [download].”
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