Mediaspace scheduled maintenance: Aug 25, 2026 07:00 - 12:00 AM. During this time, videos will be temporarily unavailable. Check status updates.

Lecture

Risk Premium Illustration in Excel

Description

This lecture covers the calculation of risk premiums in Excel, focusing on factors such as continuation prices, risk-free rates, and risky rates. It also explains the concept of discounted cash flows and the application of formulas to estimate risk premiums.

Official source

Ontological neighbourhood

Business

Finance: Corporate finance

Related concepts (32)

Risk premium

A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less the risk-free return, as demonstrated by the formula below. Where is the risky expected rate of return and is the risk-free return. The inputs for each of these variables and the ultimate interpretation of the risk premium value differs depending on the application as explained in the following sections.

Financial risk

Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent. A science has evolved around managing market and financial risk under the general title of modern portfolio theory initiated by Harry Markowitz in 1952 with his article, "Portfolio Selection".

Discounted cash flow

The discounted cash flow (DCF) analysis, in finance, is a method used to value a security, project, company, or asset, that incorporates the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management, and patent valuation. Used in industry as early as the 1700s or 1800s, it was widely discussed in financial economics in the 1960s, and U.S. courts began employing the concept in the 1980s and 1990s.

Discounting

In finance, discounting is a mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee. Essentially, the party that owes money in the present purchases the right to delay the payment until some future date. This transaction is based on the fact that most people prefer current interest to delayed interest because of mortality effects, impatience effects, and salience effects.

Risk

In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed. The international standard definition of risk for common understanding in different applications is "effect of uncertainty on objectives".

Related lectures (51)

Project Evaluation: Financial Analysis

Discusses project evaluation through financial analysis, covering rental income, adjustment rates, and net present value calculation.

Excel Data Analysis and Forecasting

Covers the basics of Excel data analysis and forecasting techniques.

Excel Exercise: Trends

Explores trend analysis in Excel using rent data from 1995 to 2023.

Understanding TRI in Financial Management

Covers the concept of Total Rate of Return (TRI) in financial management.

Asset Pricing Puzzles: Understanding Risk and Utility Models