Risk-Free Rate Puzzle - RFRP

AAA

DEFINITION of 'Risk-Free Rate Puzzle - RFRP'

An anomaly in the difference between the lower historic real returns of government bonds compared to equities. This puzzle is the inverse of the equity premium puzzle, and looks at the disparity from the perspective from the lower returning government bonds.

INVESTOPEDIA EXPLAINS 'Risk-Free Rate Puzzle - RFRP'

The risk-free rate puzzle is used to explain why bond returns are lower than equity returns by looking at investor preference. If investors tend to seek out high returns, why do they invest heavily in government bonds rather than in equities? If investors did invest in more equities, returns from equities would fall, causing the returns for government bonds to rise and making the equity premium smaller.

RELATED TERMS
  1. Risk Averse

    A description of an investor who, when faced with two investments ...
  2. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
  3. Risk Premium

    The return in excess of the risk-free rate of return that an ...
  4. Equity Premium Puzzle - EPP

    An phenomenon that describes the anomalously higher historical ...
  5. Consumption Capital Asset Pricing ...

    A financial model that extends the concepts of the capital asset ...
  6. Anomaly

    A term describing the incidence when the actual result under ...
Related Articles
  1. Fundamental Analysis

    The Capital Asset Pricing Model: An Overview

    CAPM helps you determine what return you deserve for putting your money at risk.
  2. Fundamental Analysis

    Catch On To The CCAPM

    The consumption capital asset pricing model smoothes over some of CAPM's weaknesses to make sense of risk aversion.
  3. Active Trading

    Modern Portfolio Theory: Why It's Still Hip

    See why investors today still follow this old set of principles that reduce risk and increase returns through diversification.
  4. Bonds & Fixed Income

    Equity Premiums: Looking Back And Looking Ahead

    If stocks become less profitable in the future, you may have to change your investment strategy.
  5. Something you can do for your savings and investing resolutions this year is to rely on tools already available at your workplace and take them to the max.
    Savings

    Taking Smaller And More Manageable Resolutions

    Something you can do for your savings and investing resolutions this year is to rely on tools already available at your workplace and take them to the max.
  6. The risk-free rate of return is the theoretical rate of return of an investment with zero risk.
    Investing

    Risk-Free Rate of Return

    The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free ...
  7. What's a Marketable Security?
    Active Trading

    What's a Marketable Security?

    Marketable securities are financial instruments that can be readily bought and sold in a public market. The key feature is the ease with which it can be sold and converted into cash. Usually, ...
  8. Delivery duty paid (DDP) is a shipping term.
    Investing

    What does DDP Mean?

    Delivery duty paid (DDP) is a shipping term specifying that the seller is responsible for all costs associated with delivery of the goods to the buyer. It is usually used when goods are exported ...
  9. Mergers are not the same as acquisitions.
    Investing

    What's a Merger?

    Mergers are not the same as acquisitions. In an acquisition, one company buys and subsumes another company, leaving only the buyer in place. In most mergers, both companies merge to form an entirely ...
  10. The correlation coefficient is a measure of how closely two variables move.
    Active Trading

    What's the Correlation Coefficient?

    The correlation coefficient is a measure of how closely two variables move in relation to one another. If one variable goes up by a certain amount, the correlation coefficient indicates which ...

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center