The extra expected return demanded for bearing risk, above the risk-free rate. It rewards exposure to systematic risk, not to total volatility.
Where you will meet it
Risk premium comes up in 25 learning outcome notes across the FRM syllabus.
A few of them:
Using Futures for Hedging FRM Part I · Financial markets and products
“Firm-specific risk also earns no risk premium, and a hedge can leave the firm worse off than competitors who did not hedge.”
Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) FRM Part I · Foundations of risk management
“The three components are the risk-free rate, which is the price of time, the market risk premium E(Rm) − Rf, which is the price of risk, and beta, which is the quantity of systematic risk.”
Country Risk: Determinants, Measures, and Implications FRM Part II · Credit risk measurement and management
“In the next line, CRP is the country risk premium, and the two volatilities are those of the equity market and of the sovereign bond.”
Global Financial Stability Report, Chapter 2 FRM Part II · Current issues in financial markets
“Higher uncertainty and risk aversion raise the risk premium investors demand and cut expected cash flows, so prices fall.”
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