What do you call the excess return over a risk-free rate?

The term "risk premium" refers to the excess return that an investor expects to earn over the risk-free rate as compensation for taking on additional risk. It is a fundamental concept in finance and investing, as it quantifies the reward for engaging in riskier investments as opposed to safer, risk-free assets like government treasury securities.

When an investor chooses to invest in assets such as stocks or corporate bonds, they expect to receive a higher return compared to the return on risk-free assets. The difference between these expected returns is what constitutes the risk premium. This is crucial for portfolio management because understanding the risk premium helps investors assess whether the potential rewards of their investments justify the risks involved.

In portfolio management practices, evaluating the risk premium is essential for setting investment strategies and aligning them with an investor's risk tolerance and financial goals. This helps in optimizing the risk-return profile of a portfolio, enabling better decision-making in asset allocation.

The other terms provided relate to different financial concepts: "alpha" measures an investment's performance relative to a market index, "beta" quantifies the volatility of an investment in relation to the market as a whole, and the "Sharpe Ratio" assesses risk-adjusted performance by comparing excess return to the investment's standard deviation. Each