Risk-Free Return

DEFINITION of 'Risk-Free Return'

The theoretical rate of return attributed to an investment with zero risk. The risk-free rate represents the interest on an investor's money that he or she would expect from an absolutely risk-free investment over a specified period of time.

BREAKING DOWN 'Risk-Free Return'

In theory, the risk-free rate is the minimum return an investor should expect for any investment, as any amount of risk would not be tolerated unless the expected rate of return was greater than the risk-free rate.

In practice, however, the risk-free rate does not technically exist; even the safest investments carry a very small amount of risk. Thus, investors commonly use the interest rate on a three-month U.S. Treasury bill as a proxy for the risk-free rate because short-term government-issued securities have virtually zero risk of default.

RELATED TERMS
  1. Risk-Free Asset

    An asset which has a certain future return. Treasuries (especially ...
  2. Full Faith And Credit

    A phrase used to describe the unconditional guarantee or commitment ...
  3. Risk Management

    The process of identification, analysis and either acceptance ...
  4. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  5. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with ...
Related Articles
  1. Investing Basics

    What Investors Should Know About Interest Rates

    Understanding interest rates helps you answer the fundamental question of where to put your money.
  2. Mutual Funds & ETFs

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
  3. Investing Basics

    5 Common Mistakes Young Investors Make

    Missteps are common whenever you’re learning something new. But in investing, missteps can have serious financial consequences.
  4. Mutual Funds & ETFs

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  5. Products and Investments

    A Guide to DIY Portfolio Management

    These are some of the pillars needed to build a DIY portfolio.
  6. Investing

    How Rising Interest Rates Affect Junk Bonds

    We examine the impact of rising interest rates on higher-yielding bonds.
  7. Mutual Funds & ETFs

    The 4 Best Fidelity Funds for Income Seekers in 2016

    Discover the four best fixed-income mutual funds administered and managed by Fidelity Investments suitable for income-seeking investors.
  8. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  9. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  10. Mutual Funds & ETFs

    The 4 Best Vanguard Funds for Income Seekers in 2016

    Discover four mutual funds administered and managed by the Vanguard Group that would be suitable for income-seeking investors for 2016.
RELATED FAQS
  1. How does the equity risk premium correlate with the Federal Reserve's prime rate?

    The equity risk premium correlates negatively with the Federal Reserve's prime rate. When the prime rate is declining, the ... Read Full Answer >>
  2. What is the historical market risk premium?

    The historical market risk premium is the difference between what an investor expects to make as a return on an equity portfolio ... Read Full Answer >>
  3. 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 >>
  4. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  5. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  6. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center