The premium (compensation or additional return) that is sought by risk-averse market participants for being exposed to the uncertainty, engulfing, or associated with the cash flows of an asset or a liability. In other words, it is the extra amount of return demanded by a market participant in compensation for the extra amount of risk inherent in a risky asset. This premium is calculated as the part of total expected return over and above the return on a risk-free asset. Everything else held constant, the riskier an asset, the higher the risk premium for that asset, is, and vice versa.
An example of risk premium is a market risk premium, an equity risk premium, etc.
Risk premium (plural: risk premia) is also known as a risk adjustment.
