Company-Specific Risk Premium

A company-specific risk premium is extra return added for risks unique to one business, such as dependence on one customer, a thin management team or weak financial records. It is the last layer in the build-up method and the one most open to judgment.

In this site's build-up example the premium is 2%, which brings the total to 15%. Two appraisers can look at the same company and pick different figures, so tie each point to a specific, documented risk.

CAPM ignores this kind of risk because a diversified investor can spread it away. The owner of a single private company cannot, which is why appraisers add it. Compare systematic risk, read cost of equity for a private company, and see the build-up method.