Risk premium approach

Risk premium approach

A common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.

Risk Premium Approach

In active portfolio management, a way to classify different assets according to their risk. In a risk premium approach, one seeks to find investments with higher returns for higher risks. See also: Risk Premium.
References in periodicals archive ?
Both the capital asset pricing model (CAPM) which is based on systematic risk and the risk premium approach which is based on unsystematic risk, have been used to compute expected returns.
The average cost of equity (ke) for the sample companies based on the risk premium approach is also around 14 per cent (13.
As is evident from the literature reviewed, this is perhaps the first time expected Indian stock market returns are presented and computed through both the CAPM and the risk premium approach.
This, then, forms the rationale for using the risk premium approach.
There appears to be no study estimating expected returns for the Indian stock market based or the risk premium approach (operating leverage and financial leverage).
This paper presents the expected equity returns, measured through the CAPM and the risk premium approach, for the Indian stock market, represented by the NSE 500 companies.
Another possibility for the cooperative financial manager to use is the bond-yield-plus risk premium approach.
These factors underlie the weaknesses of an ex post risk premium approach.
Generally, studies supporting an ex ante risk premium approach are based on data from as early as the mid-1960s through the mid-1980s.
The Earnings Incentive Plan option in that case included the provision for an annually authorized rerum on equity range that would span 300 basis points and be based on a risk premium approach that recognizes an inverse relationship between risk premiums and interest rates.
Vinson, 1985,"The Risk Premium Approach to Measuring a Utility's Cost of Equity," Financial Management (Spring), 33-45.