Risk-Free Return


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.

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.


Investment dictionary. . 2012.

Look at other dictionaries:

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  • Risk-Adjusted Return On Capital - RAROC — An adjustment to the return on an investment that accounts for the element of risk. Risk adjusted return on capital (RAROC) gives decision makers the ability to compare the returns on several different projects with varying risk levels. RAROC was …   Investment dictionary

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  • risk-free interest rate — Describes return available to an investor in a security somehow guaranteed to produce that return. The risk free interest rate compensate s the investor for the temporary sacrifice of consumption. Bloomberg Financial Dictionary …   Financial and business terms

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  • risk-free asset — also: riskless asset An asset whose future normal return is known today with certainty. Bloomberg Financial Dictionary …   Financial and business terms


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