Ticker: N/A In the world of finance, risk and return go hand in hand. Investors are constantly seeking opportunities to maximize their returns while managing the inherent risk associated with their investments. One crucial concept that plays a significant role in this dynamic is the excess return.
Excess return, also known as the equity risk premium, is the additional return that investors require above the risk-free rate of return. It represents the compensation investors demand for taking on the additional risk associated with a particular investment. In simple terms, it is the premium investors expect to earn for assuming higher levels of risk.
To understand the concept of excess return, it is essential to grasp the idea of a risk-free rate. The risk-free rate is the rate of return an investor can earn with certainty, typically obtained by investing in low-risk assets such as government bonds. It serves as a benchmark against which the performance of risk investments is measured. In our case, the risk-free rate is 4 percent.