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.

BREAKING DOWN '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 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. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  6. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  7. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
  8. Forex Education

    China's Devaluation of the Yuan

    Just over one week ago the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the yuan, knocking over 3% off its value.
  9. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  10. Investing Basics

    Explaining Rehypothecation

    Rehypothecation occurs when an asset used as collateral for one party is reused in another transaction.
RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  3. How are non-qualified variable annuities taxed?

    Non-qualified variable annuities are tax-deferred investment vehicles with a unique tax structure. After-tax money is deposited ... Read Full Answer >>
  4. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  5. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  6. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  2. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  3. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  4. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  5. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  6. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
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!