Classical capital asset pricing theory tells us that riskaverse investors would require higher returns to compensate for higher risk on an investment. One type of risk is price (return) risk, which reflects uncertainty in the price level and is measured by the volatility (standard deviation) of asset returns. Volatility itself is also known to be random and hence is perceived as another type of risk. Investors can bear price risk in exchange for a higher return. But are investors willing to pay a premium to enjoy lower volatility? In this essay, I try to answer this question by (1) introducing two different measures of volatility, (2) summarizing findings about volatility risk and its premiums in financial equity markets and (3) presenting preliminary research on volatility risk premiums in the markets for corn, wheat and soybeans, which are relevant to the South Dakota economy.
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