Risk Premium

Risk premium means the extra return investors demand for taking on additional risk. In simple terms, risk premium is the reward investors want for accepting uncertainty. Risk premium is important because riskier investments usually need to offer higher potential returns to attract investors. When fear rises, investors may demand a larger risk premium, which can push asset prices lower. For example, investors may demand a higher return to buy corporate bonds from a risky company than to buy U.S. Treasury bonds. Risk premium is not the same as guaranteed profit. It is extra expected return for taking risk, but the investment can still lose money.