How to Calculate the Portfolio Risk Premium

How to Calculate the Portfolio Risk Premium
••• Christine Balderas/Photodisc/Getty Images

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.

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.

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

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