Risk-Free Rate Of Return

AAA

DEFINITION of 'Risk-Free Rate Of Return'

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 investment over a specified period of time.

INVESTOPEDIA EXPLAINS 'Risk-Free Rate Of Return'

In theory, the risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate.

In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.

VIDEO

Loading the player...
RELATED TERMS
  1. Nominal Rate Of Return

    The amount of money generated by an investment before expenses ...
  2. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  3. Risk-Free Asset

    An asset which has a certain future return. Treasuries (especially ...
  4. Government Security

    A bond (or debt obligation) issued by a government authority, ...
  5. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
RELATED FAQS
  1. What does a high equity risk premium signify about a company's stock future?

    A high equity risk premium signifies that a company's stock future is uncertain. Equity risk premium is the excess return ... Read Full Answer >>
  2. What nations other than the U.S. have risk-free interest rates?

    Countries other than the United States that have risk-free interest rates are Canada, the European Union, Japan, the United ... Read Full Answer >>
  3. How is it possible for a rate to be entirely risk-free?

    It is not possible for a rate to be entirely risk-free. The risk-free rate of return is a theoretical construct that underlies ... Read Full Answer >>
  4. How is the risk-free rate of interest used to calculate other types of interest rates ...

    The risk-free rate for bonds is used for pricing the yield spread as the difference between the interest rate on a bond and ... Read Full Answer >>
  5. Where can I buy government bonds?

    The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase ... Read Full Answer >>
  6. Are long-term U.S. government bonds risk-free?

    For any debt obligation to be considered completely risk-free, investors must have full faith that the principal and interest ... Read Full Answer >>
Related Articles
  1. 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 ...
  2. Bonds & Fixed Income

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
  3. Options & Futures

    How Risk Free Is The Risk-Free Rate Of Return?

    This rate is rarely questioned - unless the economy falls into disarray.
  4. Investing Basics

    How Interest Rates Affect The Stock Market

    Whether you're buying lunch, a home or a stock, you're influenced by interest rates.
  5. Bonds & Fixed Income

    Find The Highest Returns With The Sharpe Ratio

    Learn how to follow the efficient frontier to increase your chances of successful investing.
  6. Forex Education

    How To Calculate Required Rate Of Return

    The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it.
  7. Investing Basics

    What Investors Should Know About Interest Rates

    Understanding interest rates helps you answer the fundamental question of where to put your money.
  8. 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.
  9. Options & Futures

    Employee Stock Options (ESO)

    Employee stock options are a form of equity compensation granted by companies to their employees and executives.
  10. Trading Strategies

    How To Seek Out Winning Trades

    Hunt for new winners with carefully-drawn scanning filters and third party services.

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