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. Anomaly

    A term describing the incidence when the actual result under ...
  2. Error Term

    A variable in a statistical and/or mathematical model, which ...
  3. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  4. Equity Risk Premium

    The excess return that an individual stock or the overall stock ...
  5. Risk

    The chance that an investment's actual return will be different ...
  6. Risk Averse

    A description of an investor who, when faced with two investments ...
Related Articles
  1. The Capital Asset Pricing Model: An ...
    Fundamental Analysis

    The Capital Asset Pricing Model: An ...

  2. Catch On To The CCAPM
    Fundamental Analysis

    Catch On To The CCAPM

  3. Modern Portfolio Theory: Why It's Still ...
    Active Trading

    Modern Portfolio Theory: Why It's Still ...

  4. Equity Premiums: Looking Back And Looking ...
    Bonds & Fixed Income

    Equity Premiums: Looking Back And Looking ...

comments powered by Disqus
Hot Definitions
  1. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  2. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  5. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  6. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
Trading Center