What is a premium at a market risk?
All investors have to deal with the risk of the expected return on their investment. A premium market risk is a way to measure the risk of market or investment in capital compared to investment with a guaranteed or risk -free return. The market risk of investment is expressed as the difference between the expected return on capital investment and the return on risk of risk -free investment. SML is a graph that sets a market risk of a specific investment in relation to the market return at a certain period of time. It shows all risk investments in securities. Investors can easily find out where the investment falls in the graph to determine the amount of risk in relation to the expected return. CAPM includes the idea that investors must be compensated for time value of money and risk investment. The time value is represented by the helpless return part of the formula. According to the CAPM model, if the risk bonus does not meet or defends the required investor's return to compensate for additional risk, the investor should hand over the investment.
To calculate the current market risk of premium, investors take the current risk-free investment return-unable to US government bonds-A compare this return with an estimated return of risk investment. Suppose, for example, the current return on bonds is two percent and the estimated return of risk market investments is eight percent. Premium market risk of risk investment would be the difference between the two yields or six percent. The investor can then decide whether another six percent yield is worth the added risk.
Investors also use different types of market risk to determine the risk. These include the Historical Market Risk Premium and the expected market risk of the premium . The historical market for the risk of the market compares the historical return of the stock market compared to the US cash registers. Expected market risk bonus compares estimated future income of the stockmarket compared to the return on bonds in the US.
These calculations help the investor to determine the level of risk versus a risk -free investment. Will not guarantee the rate of return or any return. Investors generally use risks as part of the overall investment strategy.