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why equity shareholders ask for additional risk premium for their investmnt ? comment in brief

why equity shareholders ask for additional risk premium for their investmnt ? comment in brief

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Answer #1

Equity investment is special type of investment. These people are risky investors because the market fluctuates for every second guaranteeing no profit. To make atleast profit the investors need the return greater than risk free rate (Rm-Rf) . Thus they are taking additional risk greater than the risk free rate. This concept is explained by willam Sharpe called CAPITAL ASSET PRICING MODEL.

Sharpe ratio=( Rm-Rf )/sigma

Hence for any additional risk they are taking expecting a return which is of greater thank risk free rate.

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