The interest rate used to define the “risk-free” rate of return is the

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a. discount rate.

90-day Treasury bill rate.

five-year Treasury note rate.

federal funds rate.

Answers: b

The 90-day Treasury bill rate is used because there is no credit risk, and the maturity is so short that there is no liquidity or market risk. The five-year Treasury also has no credit risk, but if interest rates rise, the market value could decline.


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