Risk premium refers broadly to the additional return demanded by investors above a risk-free rate to compensate for taking on risk. In valuation, it encompasses three components: the market risk premium (systematic market risk), the size premium (small company specific risk) and the specific risk premium (SCRP — idiosyncratic company risk). Together they determine the equity risk premium component of the cost of equity in the WACC. Each component must be individually documented and justified in valuation reports submitted to tax authorities, auditors and courts.

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Example: for a Swiss industrial SME non-listed valuation: market risk premium 6.5%, levered beta contribution 1.05 × 6.5% = 6.83%, size premium 2.5% (Duff & Phelps reference), SCRP 1.5% (key person risk + customer concentration). Total equity risk premium = 10.83%. Added to the 1.0% risk-free rate, the cost of equity is 11.83% — the primary input into the WACC calculation.

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Hectelion documents and justifies every component of the risk premium in valuation reports, providing market-referenced conclusions that withstand regulatory and judicial scrutiny.