Risk premium

1. Financial reporting - fair valuation.

For financial reporting and fair valuation purposes, risk premium is defined as additional compensation sought by rational risk-averse market participants for bearing the uncertainty inherent in the cash flows of an asset or a liability.

This is a similar concept to market risk premium in the Capital asset pricing model.

2.

More broadly, value ascribed by any market participant to a reduction in uncertainty.

This value would not necessarily be the same for all market participants.

See also

• Capital asset pricing model
• Fair value
• IFRS 13
• Market participant
• Market risk premium
• Rational
• Risk appetite
• Risk averse
• Risk management