How to Calculate the Portfolio Risk Premium

The portfolio risk premium is the amount of risk your portfolio has that is above the risk-free rate. In order to calculate portfolio risk premium, you need to know the expected return on your portfolio and the risk-free rate. Normally, investors use the 90-day Treasury-Bill rate for the risk-free rate. Businesses need to provide investors a return over the risk-free rate in order to get investors to invest. If it is a risk investment, the portfolio risk premium increases.

• 1

  Go to the Federal Reserve T-Bill rate page, located in the resources and find the rate on the bills for the current month. This is the risk-free rate.

• 2

  Determine the amount the investment expects to make during the life of the investment. This is the expected return.

• 3

  Subtract the risk-free rate from the expected return to determine portfolio risk premium.