What does the term "risk premium" refer to in fundamental analysis?

The term "risk premium" in fundamental analysis specifically refers to the return that investors expect to receive over and above the risk-free rate of return as compensation for taking on additional risk associated with riskier assets. This concept is fundamental to understanding investment behavior, as investors need to be incentivized to commit their funds to assets that carry a higher level of uncertainty or potential for loss.

In this context, the risk-free rate represents the return on an investment perceived to have no risk of financial loss, typically associated with government bonds from stable countries. Investors consider various factors when assessing the level of risk associated with different types of investments—such as equities or corporate bonds—compared to government securities.

In summary, the risk premium quantifies the additional return that investors demand for the increased risk, helping to explain the various returns on different investments in financial markets.