Risk Premium Calculator
Compare expected return against risk-free alternatives and test CAPM-based required return in one place. For inflation-adjusted assumption setup before premium analysis, use Real Interest Rate Calculator.
Risk Premium Inputs
Model excess return over risk-free alternatives and optionally run CAPM alpha diagnostics.
Quick Presets
Risk Premium Results
Interpretation Snapshot
Risk level
Elevated Premium
Premium dollars (annual)
$5,500.00
Alpha vs CAPM
0.00%
CAPM Trace
Beta: 1.10
Market Return: 9.50%
Market Risk Premium: 5.00%
CAPM Required Return: 10.00%
Key Insights
- •Expected return +10.00% minus risk-free +4.50% gives premium +5.50%.
- •On $100,000.00, the premium component is $5,500.00 per year before taxes and fees.
- •CAPM required return is 10.00%; alpha is 0.00% versus that benchmark.
- •Premium-to-risk-free ratio is 1.22x, useful for quick scenario comparison under one rate basis.
Editorial & Review Information
Reviewed on: 2026-03-02
Published on: 2025-12-03
Author: LumoCalculator Editorial Team
What we checked: We checked the risk premium and CAPM alpha formulas, made sure the default example and shared result link show the same numbers, and confirmed all reference links are available.
Purpose and scope: This page supports educational risk/return comparison and planning discussions. It is not an individualized recommendation engine.
How to use this review: Run base and stress assumptions for expected return, risk-free rate, and beta, then compare premium and alpha before applying the output to allocation or valuation decisions.
Formula and Standards Basis
Core formulas
Risk Premium = Expected Return - Risk-Free Rate
Market Premium = Market Return - Risk-Free Rate
CAPM Required Return = Risk-Free Rate + Beta x Market Premium
Alpha = Expected Return - CAPM Required Return
Reference rate context (illustrative)
- 3-month U.S. Treasury: 4.50%
- 10-year U.S. Treasury: 4.30%
- Fed funds upper bound: 5.50%
- Long-run U.S. equity return context: 10.00%
Use rates that match your horizon and decision context; avoid mixing short-term and long-term bases.
Financial Disclaimer
This calculator is for educational planning use only. It does not model taxes, fees, liquidity constraints, changing volatility regimes, scenario path dependence, or cash-flow timing effects. Results are assumption-sensitive and should be validated with qualified financial, legal, tax, or accounting professionals before implementation.
Use Scenarios
Portfolio screening
Compare candidate investments by excess return over a shared risk-free anchor before deep due diligence.
Manager or strategy review
Use alpha as a benchmark-adjusted check when evaluating whether expected performance justifies systematic risk exposure.
Valuation handoff
After estimating required return assumptions, continue to WACC Calculator for discount-rate integration in valuation workflows.
Formula Explanation
Risk premium interpretation
Risk Premium = Expected Return - Risk-Free Rate
This output measures the assumed reward for bearing non-risk-free uncertainty. A negative value means the assumption set does not compensate risk-taking.
CAPM required return
Required Return = Risk-Free Rate + Beta x (Market Return - Risk-Free Rate)
CAPM scales market premium by beta to estimate return required for systematic risk. Beta above 1 implies higher sensitivity to market swings.
Alpha as a gap metric
Alpha = Expected Return - CAPM Required Return
Positive alpha indicates expected return exceeds the CAPM hurdle under current assumptions; negative alpha indicates a shortfall.
Benchmark Context
| Asset Class | Typical Premium Range | Interpretation |
|---|---|---|
| Investment-grade bonds | 1% to 3% | Lower credit and duration risk than equities; usually lower excess return expectation. |
| Broad developed-market equities | 4% to 7% | Typical long-run equity premium range used in planning and valuation contexts. |
| Small-cap or cyclical equities | 6% to 10% | Higher volatility and drawdown risk usually require a larger risk compensation range. |
| Emerging-market equities | 7% to 12% | Country, currency, and liquidity risks can widen required premium assumptions. |
Example Cases
Case 1: Moderate premium equity screen
Inputs
- Expected return: 9.00%
- Risk-free rate: 4.50%
- Investment amount: $100,000
- CAPM inputs: Beta 1.00, market return 9.00%
Computed Results
- Risk premium: +4.50%
- Premium dollars: $4,500.00
- CAPM required return: 9.00%
- Alpha: +0.00%
Interpretation
Assumed return is exactly in line with CAPM under market-beta exposure.
Decision Hint
Use additional factors (fees, liquidity, concentration) before approving allocation.
Case 2: High-premium growth assumption
Inputs
- Expected return: 15.00%
- Risk-free rate: 4.50%
- Investment amount: $80,000
- CAPM inputs: Beta 1.40, market return 10.00%
Computed Results
- Risk premium: +10.50%
- Premium dollars: $8,400.00
- CAPM required return: 12.20%
- Alpha: +2.80%
Interpretation
The premium is high and CAPM gap is positive, but assumptions are also more aggressive.
Decision Hint
Run downside scenarios (for example 11% to 13% expected return) to test robustness.
Case 3: Negative premium warning
Inputs
- Expected return: 3.50%
- Risk-free rate: 4.50%
- Investment amount: $120,000
- CAPM inputs: disabled
Computed Results
- Risk premium: -1.00%
- Premium dollars: -$1,200.00
- Risk level label: Negative Premium
- CAPM metrics: N/A
Interpretation
Assumption set implies lower return than risk-free alternatives.
Decision Hint
Reassess return expectations or use lower-risk instruments if this scenario is realistic.
Boundary Conditions
Sources & References
- U.S. SEC Investor.gov - Introduction to Investing - Tier 1 source for investor-education context on risk and return tradeoffs.
- Federal Reserve - Monetary Policy - Tier 1 source for policy-rate context affecting risk-free assumptions.
- U.S. Treasury - Daily Treasury Yield Curve Rates - Tier 1 reference for practical Treasury rate inputs by maturity.
- U.S. SEC - Resources for Investors - Tier 1 investor-protection reference for educational materials and risk-awareness context.
- Investopedia - Risk Premium - Tier 3 supplementary terminology reference for explanatory wording consistency.