Risk Premium Calculator
Calculate the risk premium between an investment's expected return and the risk-free rate.
Use for CAPM analysis, DCF discount rates, and cost of equity.
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.
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.