Risk Premium Calculator

The risk premium is the extra return you demand for holding a risky asset instead of a safe one. It is the foundation of almost every asset pricing model in finance.

The formula:

Risk Premium = Expected Return - Risk-Free Rate

If you expect a stock to return 11% per year and the current 10-year Treasury yield is 4.5%, your risk premium is 6.5%. That 6.5% is the compensation you are implicitly requiring to accept the possibility of losing money, versus locking in the Treasury’s guaranteed yield.

The equity risk premium (ERP) applies this to the entire stock market rather than a single stock. Historical long-run equity risk premiums for US stocks have been roughly 4-6% above Treasury rates, though this shifts with market conditions and methodology. The Damodaran dataset at NYU is the standard academic reference, updated each January.

Risk premium appears inside the Capital Asset Pricing Model:

Expected Return = Risk-Free Rate + Beta x Equity Risk Premium

A stock with a beta of 1.5 should demand 1.5 times the market risk premium above Treasuries. Beta measures how much a stock moves relative to the market: beta of 1.0 moves in line with the market; 1.5 amplifies market swings by 50%; 0.7 damps them.

This calculator handles two use cases. You can enter an individual stock’s expected return and the risk-free rate to find the risk premium for that position. Or enter the expected market return and the risk-free rate to calculate the equity risk premium you are implicitly using in your models.

The premium in CAPM is the MARKET’s, not your stock’s

This is the part that trips people up, and getting it backwards produces a number that looks reasonable and is not. In the formula above, the premium multiplied by beta is the equity risk premium: the market’s excess return over the risk-free rate. It is not the excess return of the stock you are analyzing.

The reason is that beta is what converts market risk into stock risk. If you take a stock’s own risk premium, which already reflects that stock’s risk, and multiply it by beta again, you have counted the same risk twice. A stock expected to return 11% against a 4.5% risk-free rate has a 6.5% premium. Multiplying that by a beta of 1.2 and adding the risk-free rate gives 12.3%, a figure that means nothing at all.

So this page asks for the expected market return separately. Give it one, along with a beta, and you get the return CAPM says the stock should deliver for its risk. Compare that with what you actually expect and the difference is Jensen’s alpha: positive means you think the stock is priced to beat its risk, negative means you are being paid too little for what you are taking on. That comparison is the whole reason to run CAPM on a single stock.

Practitioners use risk premium to set discount rates for DCF analysis. A company facing high uncertainty deserves a higher discount rate than a stable utility, which is why the ERP is not a constant but something analysts calibrate to current market conditions.