DEFINITION of 'RiskFree Rate Of Return'
The theoretical rate of return of an investment with zero risk. The riskfree rate represents the interest an investor would expect from an absolutely riskfree investment over a specified period of time.
INVESTOPEDIA EXPLAINS 'RiskFree Rate Of Return'
In theory, the riskfree 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 riskfree rate.
In practice, however, the riskfree rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a threemonth U.S. Treasury bill is often used as the riskfree rate.
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