Risk-Free Rate
Definition
What is Risk-Free Rate?
The return assumed to be available from an investmentAn asset or commitment of money made with the expectation of future income, growth, or both. with negligible default riskThe risk that an issuer does not pay interest or principal when due. over a matching period.
Example in practice
How This Looks in Practice
Analysts often use a short-term government yield as a practical risk-free proxy.
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Related Terms
Capital Asset Pricing Model
A model linking expected return to the risk-free rate, market risk premium, and an asset's beta.
Portfolio TheorySecurity Market Line
A line showing the CAPM relationship between expected return and beta.
Portfolio TheoryEfficient Frontier
The set of portfolios offering the highest expected return for each level of risk under stated assumptions.
Fraud & ScamsPonzi Scheme
A fraud that pays earlier participants using money from newer participants rather than genuine investment profits.