Risk-Free Return

What is 'Risk-Free Return'

Risk-free return is 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. Risk-Neutral Measures

    A theoretical measure of probability derived from the assumption ...
  3. Risk Premium

    The return in excess of the risk-free rate of return that an ...
  4. Market Risk Premium

    The difference between the expected return on a market portfolio ...
  5. Zero-Beta Portfolio

    A portfolio constructed to have zero systematic risk or, in other ...
  6. Low Interest Rate Environment

    A low interest rate environment is when the risk-free rate of ...
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. Investing

    Understanding Market Risk Premium

    Market risk premium is equal to the expected return on an investment minus the risk-free rate. The risk-free rate is the minimum rate investors could expect to receive on an investment if it ...
  3. Professionals

    Rate of Return Basics

    CFA Level 1 - Rate of Return Basics. Learn the components of the required rate of return. Discusses the various forms of risk-free rates, which serve as the base for return.
  4. Options & Futures

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

    This rate is rarely questioned - unless the economy falls into disarray.
  5. Professionals

    Capital Market Theory

    CFA Level 1 - Capital Market Theory. Learn the assumptions behind the capital market theory. Shows what happens to a portfolio's return and variance when adding a risk-free asset.
  6. Personal Finance

    Risk-Free & 20% Return? More Like 100% Scam

    An investment that promises a risk-free return of 20% is 100% likely to be a scam.
  7. Fundamental Analysis

    Calculating the Equity Risk Premium

    Equity risk premium is the excess expected return of a stock, or the stock market as a whole, over the risk-free rate.
  8. Real Estate

    How Interest Rates Affect Property Values

    Along with their impact on mortgages, interest rates affect capital flows, the supply and demand for capital, and an investor’s required rate of return.
  9. Investing Basics

    How to Calculate Risk Premium

    Think of a risk premium as a form of hazard pay for risky investments.
  10. Options & Futures

    How & Why Interest Rates Affect Futures

    There are at least four factors that affect change in futures prices, including risk free-interest rates, particularly in a no-arbitrage environment.
RELATED FAQS
  1. How is it possible for a rate to be entirely risk-free?

    Find out whether there really is such a thing as a risk-free rate of return, and learn why taking the idea of risk-free rates ... Read Answer >>
  2. How is the risk-free rate of interest used to calculate other types of interest rates ...

    Learn how the risk-free rate is used to compare the yields on bonds, and understand how T-bills are used as a proxy for the ... Read Answer >>
  3. What is the correlation between equity risk premium and risk?

    Learn about the relationship between the risk-free rate of return and the equity risk premium, and understand how the risk-free ... Read Answer >>
  4. How is the risk-free rate determined when calculating market risk premium?

    Learn how the risk-free rate is used in the calculation of the market risk premium, and understand why T-bills provide the ... Read Answer >>
  5. What nations other than the U.S. have risk-free interest rates?

    Find out which countries have risk-free rates of returns. This is typically the yield on a 3-month note, and it can be negative ... Read Answer >>
  6. How accurate is the equity risk premium in evaluating a stock?

    Learn about the drawbacks of using the equity risk premium to evaluate a stock, and understand how it is calculated using ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center