Risk-free asset

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Risk-free asset

An asset whose future normal return is known today with certainty.

Risk-Free Asset

An asset in which the return is known with certainty. The certainty generally comes from a supreme amount of confidence in the issuer of the asset; for example, Treasury securities are considered risk-free because the United States government is considered the best possible issuer. Critics contend that there is no such thing as a risk-free asset because, in theory, even the US government could default. However, risk-free assets have such a low level of risk that it may be ignored. Nonetheless, risk-free assets usually have a low rate of return, and, as a result, even these are exposed to inflation risk.
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If there exists a risk free asset providing monetary services, its risk free rate obeys:
We used the constant relative risk aversion (CRRA) utility function to estimate the optimal portfolios, we tested the model for several levels of risk aversion, and even for extreme risk aversions [gamma] = 100, the investor chooses to keep some of his wealth in stocks when the risk free asset is available.
The portfolio is 100% long in low-priced stocks, 100% short in high-priced stocks and 100% long in a risk free asset.
Nick Tolchard said, "Non-resident Indians view cash as having an attractive relative yield as well as being a more risk free asset, thus leading them to allocate more to Indian based deposits.
For fixed income investors, the emergence of EM countries with better macroeconomic fundamentals than many developed countries may over the long run alter the concept of what constitutes a risk free asset.
Investment programmes that focus on short-term payment certainty will struggle, as they will need to redefine what a risk free asset is.
Combing the risk free asset with the Markowitz efficient portfolio he introduced the capital market line as the efficient portfolio line.
When there is a risk free asset the optimization problem slightly changes.
Locals at PSX fear that a rapid tightening in interest rates by US Federal Reserves will likely result in liquidity fleeing from risky emerging markets to the US bonds that are considered risk free assets.
This article makes an attempt to present the various facets of this important issue that might end the present world of risk free assets.
In a sign that regulators are already aware of the problem, the head of the European Central Bank's supervisory arm -- which takes powers over euro zone banks on Nov 4 -- told Estonian newspaper Aripaev recently that the financial crisis taught Europe that there are no truly risk free assets.
Richani also went through the important lessons that the markets should have learned well from the crisis relating to risk taking, redefining risk free assets, leverage, black swans, correlations, diversification, contagion risk, herd mentality and the new normal but it seems that humans and investors forget as always and they revert all the time to believing that this time is different.

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