Risk premium
What extra return do investors demand simply for holding something risky, and how can you see it in prices?
In plain words
A risk premium is the return an asset is expected to earn over a safe alternative, purely for the risk of holding it. It is the payment for uncertainty, not for the asset's useful features.
Why it matters
The premium explains why risky assets can attract capital even when they fall often: over long periods, holding them should pay more than a safe asset. But the premium is only realised if the asset survives the bad weeks that come with it.
In a real week: ETH, week of 20 June 2022
In the week of 20 June 2022, ETH rose 6.14% after four consecutive down weeks, while its realised volatility was 107.4% a year and its range reached 22.65%. The move came with the asset still 75.29% below its 52-week high: a reward for bearing that risk, not proof the premium has been paid in full.
A common mistake
Treating any single positive week as evidence that the risk premium has been earned. The premium is a long-run average; short periods can pay well or badly.