how is risk premium calculated 
the risk premium can be calculated by subtracting the expected return of a risk free investment from the expected return of an investment with risk what you are left with is the compensation for the risk you re taking on the bottom linethe higher the risk of losing capital the more an investor expects to be compensated this compensation comes in the form of a risk premium which basically means the extra returns above what can be earned on an investment without risk over the past 90 odd years the risk premium of stocks in the u s has averaged about 5 equity markets can fluctuate a lot though and a higher erp doesn t necessarily mean you should buy just as a lower erp shouldn t necessarily force you to look elsewhere 