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.

RELATED TERMS
  1. Nominal Rate Of Return

    The amount of money generated by an investment before expenses ...
  2. Equity Risk Premium

    The excess return that an individual stock or the overall stock ...
  3. Government Security

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

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

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

    An asset which has a certain future return. Treasuries (especially ...
Related Articles
  1. Understanding The Sharpe Ratio
    Bonds & Fixed Income

    Understanding The Sharpe Ratio

  2. How Risk Free Is The Risk-Free Rate ...
    Options & Futures

    How Risk Free Is The Risk-Free Rate ...

  3. How Interest Rates Affect The Stock ...
    Investing Basics

    How Interest Rates Affect The Stock ...

  4. Find The Highest Returns With The Sharpe ...
    Bonds & Fixed Income

    Find The Highest Returns With The Sharpe ...

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center