Aggregate Risk PremiumsCompare Historical average rates of return on risky securities to the historical average rate of return free securities over the same period and SUBTRACT the two to get a rough idea of the risk premium for that type of risky security.T-Bill RateIs normally used as the risk free rate of return "rf"Problems with using aggregate risk premium1. Post data on averages (unstable over time, too high for long term forecast)
2. Appropriate time Period?
3. Gross Measure (unrefined)RiskPotential for getting outcomes (realized rates of return) which are different from the expected outcomeSystematic Risk or NondiversifiableRisk an investor cannot get rid ofUnsystematic or DiversifiableRisk an investor