How much risk premium is enough?

[bullboy8]

1) lets assume the "risk free rate is 5%" and my expected return is 10% (derived from historic return) but how can i work out whether the 5% risk premium is sufficient? is there a calcuation out there somewhere?

For my risk premium I would consider the 8 types of risk-

interest, market, inflation, business, financial , liquidity, exhcnage rate, coutry

But how do I put go about assigning a % for each of the 8 risk. For example, If i think there is a high exchange rate risk, how can I translate this into a percentage for the risk premium? This is far too complicated.

Thanks

 

[Rhody Trader]

This is far too complicated.

Yup. Even if you came up with a way to assign some kind of % to risk premium, it would only be a guesstimate. You're probably better off just looking at the risk premium on a historical basis to know whether it's running high or low.

 

[Jemima]

Sharpe / Jensen Ratio's will tell you whether the excess return (the 5% on top) is worth it given the risks you are taking with your PnL.

 

[arabianights]

google capm, efficient frontier, etc etc and while you can't come up with what is 'enough' you can come up with what the market believes to be enough and see if your strategy is consistent with that