It stands for systematic risk premium; the risk premium for systematic risk. It is the risk premium against the overall market risk, reflecting the additional compensation associated with the risk of co-movement (of an entity or a stock or broadly an instrument) with the market. A total risk premium is decomposed into two components: systematic risk premium (SRP) and idiosyncratic risk premium (IRP). Systematic risk, by nature, is that source of risk that cannot be diversified away by means of diversification.
Systematic risk premium, per se, constitutes part of a required return, over and above the respective risk-free rate (RFR):
Required return = risk free return + systematic risk premium.
For a portfolio, total risk consists of unsystematic risk and systematic risk. A well-diversified portfolio is only left with systematic risk, as the unsystematic risk can be diversified away. A holder of a well-diversified portfolio will only require a compensation (premium) for systematic risk. The required return consists of the risk-free rate plus a systematic risk premium.
In different contexts, SRP may also denote service release premium, suggested retail price, shareholder rights plan, structured retail products, and supervisory review process.
