Why it matters
An expectation of higher returns is not a free bonus. The premium describes compensation sought for additional uncertainty, while realised results may be worse than the benchmark.
A worked example
If an uncertain investment has an expected return of 7% and a comparable benchmark offers 3%, the illustrative expected premium is 4 percentage points.
Illustrative example · simplified assumptionsA common mistake
Believing a higher expected return guarantees a higher actual return.
Where the idea needs care
Expected is not realised. Currency, maturity and benchmark suitability affect the comparison.
Apply the idea
Explain this concept using a different example from your spending, work, business or a policy debate. State what stays fixed and what could change the result.
See the supporting infographic
The written explanation above is the main lesson. This image offers another way to remember it.
Sources and further study
Examples and explanations by Alibomics. Numeric illustrations are not current market quotations.