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

a. discount rate.

b.
90-day Treasury bill rate.

c.
five-year Treasury note rate.

d.
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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