Risk Premium and Comparison with Damodaran Methodology

Štefanová, N.; Krulický, T.; Machová, V.

This paper discusses the essential aspects of the methodology of creating a risk premium. It is expressed by the level of systematic risk in the economy and part of the expected return on investment. It only exists because it is impossible to estimate the future values of a selected investment and it expresses a certain degree of uncertainty. The aim of the paper is to compare the calculation methods used for the risk premium of the Czech Republic. The methodology provides an analysis of calculation methods, in particular the basic CAPM method and modified Tax-CAPM, or the relative standard deviation method, government bond default spreads and the risk-adjusted discount rates according to Damodaran. The modified concept of the CAPM model according to Damodaran seems to be most appropriate for the Czech Republic. The model includes a country risk premium. However, the size of a company must be taken into account and the recommended market volatility coefficient of 1.5 may have to be adjusted to a higher value. However, no exact rules of procedure are available to clearly determine which models would be most appropriate for use. These are only speculations and approximate estimates in the calculation.