THE RISK PREMIUM AND THE RISK-FREE RATE

Are you a risk-taker? Some people love to take risks, but most of us are risk-averse. Sure, we risk-averse people might take a gamble occasionally, but we certainly expect to be compensated for that risk. This notion of being compensated for taking on risk is one of the cornerstones of investment theory.

In this tutorial on risk and risk premiums, you will learn about the following topics:

What Is Risk? Why Would Anyone Want to Take a Risk? The Risk Premium Approximations of Risk Premiums and the Risk-Free Rate Some Final Words on Risk

Let's get started by identifying some specific risks in the world of investments.