Risk-free rate of return,
Definition of Risk-free rate of return:
In theory, the risk-free rate is the minimum return an investor expects for any investment because he will not accept additional risk unless the potential rate of return is greater than the risk-free rate.
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 investment over a specified period of time. The real risk-free rate can be calculated by subtracting the current inflation rate from the yield of the Treasury bond matching your investment duration.
The optimum rate of return on an investment that can be achieved without incurring any risk whereby the investor is assured of receiving both original principal and a minimal return over a period of time. The rate of a U.S. Treasury security provides the comparative basis for determining a risk-free rate of return.
How to use Risk-free rate of return in a sentence?
- In practice, the risk-free rate of return does not truly exist, as every investment carries at least a small amount of risk.
- To calculate the real risk-free rate, subtract the inflation rate from the yield of the Treasury bond matching your investment duration.
- The risk-free rate of return refers to the theoretical rate of return of an investment with zero risk.
Meaning of Risk-free rate of return & Risk-free rate of return Definition