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 Premium

    The return in excess of the risk-free rate of return that an ...
  2. Capital Asset Pricing Model - CAPM

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

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

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

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

    The chance that an investment's actual return will be different ...
RELATED FAQS
  1. What are the advantages of investing in ETFs with high trading volume?

    The advantages of investing in an exchange-traded fund (ETF) with high trading volume are increased liquidity, great parity ... Read Full Answer >>
  2. Why is the use of contra accounts so important for maintaining ledgers?

    Contra accounts have been used in financial accounting to verify the balance of another corresponding account since Renaissance ... Read Full Answer >>
  3. Who are Tesla's (TSLA) main suppliers?

    A relative newcomer to the automotive sector, Tesla Motors (TSLA), headquartered in California, is an auto manufacturer and ... Read Full Answer >>
  4. Which REITs pay the highest dividends?

    A real estate investment trust (REIT) is a financial security that trades like a stock on major market exchanges. However, ... Read Full Answer >>
  5. What is the difference between an Equity REIT and a Mortgage REIT?

    There are several types of real estate investments trusts (REITS) that investors can purchase, including equity REITS and ... Read Full Answer >>
  6. How does a lack of demand affect financial markets?

    A lack of demand affects financial markets by leading to lower prices. The function of financial markets is to constantly ... Read Full Answer >>
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. Taxes

    What is Adjusted Gross Income?

    Adjusted gross income (AGI) is a term from the Internal Revenue Code. AGI is used to determine a person’s income taxes due.
  6. Economics

    What are Accounting Principles?

    The term accounting principles refers to rules and guidelines companies use to help them record their business and financial transactions.
  7. Economics

    Understanding the Accounting Cycle

    An accounting cycle consists of the traditional procedures performed to record business events and transactions in a company’s accounting records.
  8. Entrepreneurship

    How Able Lending Works

    A new wave of peer-to-peer and peer-to-business lenders is reshaping the way borrowers obtain credit. Able's unique take may set it apart.
  9. Credit & Loans

    How To Get A Mortgage On A Houseboat

    You actually can't get a mortgage on a houseboat, but you can get a loan. A floating home, however, is eligible for a mortgage. Read on for advice.
  10. Retirement

    The Foreigner's Guide To Retiring In Japan

    While Japan is an easy country to visit, retiring there can be a challenge due to the high cost of living and lack of any formal retirement visa plan.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center