GENERAL KNOWLEDGE

Detailed explanation-1: -The risk premium is the difference between the expected value and the certainty equivalent. For risk-averse individuals, risk premium is positive, for risk-neutral persons it is zero, and for risk-loving individuals their risk premium is negative.

Detailed explanation-2: -A quantitative and practical method is the following: we attributed a number from 1 (lowest risk aversion) to 5 (highest risk aversion) to an investor. We then assign this number the letter A, which is called the “risk aversion coefficient".

Detailed explanation-3: -A risk premium is the investment return an asset is expected to yield in excess of the risk-free rate of return. An asset’s risk premium is a form of compensation for investors. It represents payment to investors for tolerating the extra risk in a given investment over that of a risk-free asset.

Detailed explanation-4: -A risk premium is the higher rate of return you can expect to earn from riskier assets like stocks, instead of investing in a risk-free assets like government bonds.