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. Equity Risk Premium

    The excess return that an individual stock or the overall stock ...
  3. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  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 main benchmarks that track the performance of the Internet sector?

    The main benchmarks that track the performance of the Internet sector are the Nasdaq Composite Index, the First Trust Dow ... Read Full Answer >>
  2. How can I use asset allocation to properly diversify my portfolio?

    Asset allocation is the process of dividing a portfolio among a number of different asset classes. Most commonly, asset allocation ... Read Full Answer >>
  3. What are some of the limitations and drawbacks of using a payback period for analysis?

    Limitations, or disadvantages, of using the payback period method in capital budgeting include the fact that it fails to ... Read Full Answer >>
  4. What level of annual growth is common for companies in the Internet sector?

    The Internet services sector consists of a diverse group of companies that exhibit strong growth potential. Investors often ... Read Full Answer >>
  5. What are the similarities and differences between the savings and loan (S&L) crisis ...

    The savings and loan crisis and the subprime mortgage crisis both began with banks creating new profit centers following ... Read Full Answer >>
  6. What are some common cash-debt strategies that occur during a spinoff?

    Cash-debt strategies that are commonly used to in a spinoff to enable the parent company to monetize the spinoff are debt/equity ... 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. Insurance

    Why Is Health Care So Expensive In The Us?

    The U.S. is the world leader in only one area of health care: costs. Why is it so hard to rein in these expenses?
  6. Personal Finance

    cities with best healthcare system

    A starting guide to figuring out where the best care is when the diagnosis is a scary one.
  7. Insurance

    Do You Need Kidnap & Ransom Insurance?

    Americans working abroad – and high-profile individuals traveling frequently in kidnapping hot spots – should consider this type of protection.
  8. Stock Analysis

    Why Hasn't McDonald's Beaten The Dow Recently?

    McDonald's has underperformed the Dow Industrials since 2009, but a reorganization and buyback could turn things around.
  9. Stock Analysis

    Whole Foods Pricing: Mistake or Misdeed?

    Whole Foods Market might soon find itself in the middle of a public relations nightmare. But will its share price suffer?
  10. Personal Finance

    5 Signs You Need A Postnup

    They're not the most fun thing to contemplate, but these contracts can actually help a marriage.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!