How is the risk premium calculated?
In practice, the risk premium is equal to the difference between the return observed on the market based on a benchmark index and the rate without risk.
The officials at trades which present risks and exceptional fatigue are classified in the active category (police officers, firefighters, prison guards, hospital workers, etc.); The second category, called sedentary, includes all other jobs.
At the start of 2021, theOATs to 10 years oscillated between -0.37% and -0.23% in line with 2020.
L’10-year OATs serves as a reference for setting mortgage rates. If theOATs remains in positive territory, banks could therefore raise their interest rates in the coming weeks.
Expressed as a percentage, the risk premium is the difference in return between a safe investment (such as OATs) and another deemed more risky (such as a share). It represents in a way the remuneration of the risk taken by the investor
For the United States, the equity risk premium is 6.25%. source – stern.nyu.edu Expected Stock Market Return = Rm = Rf + Market Premium = 2.90 + 6.25% = 9.15%
The disadvantage of this method of calculation is that the past risk premium does not necessarily reflect the future. The prospective risk premium is calculated based on the share price at a time T and dividend expectations over a given period.
The greater the risk aversion, the more investors will demand a substantial risk premium. On the equity market, this premium is one of the valuation elements taken into account by analysts to assess the attractiveness of a security or a sector.