MANAGEMENT

Detailed explanation-1: -If the stock of a public company has delivered an annual return of 10%, the risk premium for that stock would be 8%-or the difference between the risk-free rate and the stock’s annual return.

Detailed explanation-2: -The risk-free rate refers to the rate of return on a theoretically riskless asset or investment, such as a government bond. All other financial investments entail some degree of risk, and the return on the investment above the risk-free rate is called the risk premium.

Detailed explanation-3: -You can find out the risk premium by subtracting the return on a risk-free investment from the return on the investment. Risk Premium = Rate of Return – Risk-Free Rate of Return.

Detailed explanation-4: -To calculate the real risk-free rate, subtract the inflation rate from the yield of the Treasury bond matching your investment duration.

Detailed explanation-5: -The risk premium is comprised of five main risks: business risk, financial risk, liquidity risk, exchange-rate risk, and country-specific risk.