To calculate the expected risk premium on a stock, one must subtract the risk-free rate from the stock’s expected return.
The risk-free rate is the amount of interest that an investor may potentially receive from a totally risk-free investment over a specific period of time. An asset's predicted additional investment return over and above the risk-free rate of return is known as a risk premium. Investors hope to make up for the risk they are incurring by getting a return on their investment. The result of this is a risk premium.
The risk premium formula is easy to calculate: just deduct the anticipated return on a certain asset from the risk-free rate, which is the actual interest rate paid on risk-free investments like Treasury securities and government bonds.
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