Risk-Free Rate of Return

Risk-Free Rate of Return

The return on any risk-free investment. A common example of a risk-free rate of return rate is the return on a U.S. Treasury security. The risk-free rate of return exists in order to compensate the investor for the temporary tying up of his/her capital. See also: Capital Allocation Line.

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Risk-Free Rate of Return

What Does Risk-Free Rate of Return Mean?

The theoretical rate of return for an investment that has zero risk. The risk-free rate represents the expected return from an absolutely risk-free investment over a specified period.

Investopedia explains Risk-Free Rate of Return

In theory, the risk-free rate of return is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate. In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. The interest rate on a three-month U.S. Treasury bill often is used as the risk-free rate.

Related Terms:
• Modified Internal Rate of Return
• Return on Investment—ROI
• Risk-Return Trade-Off
• Treasury Bill—T-Bill
• U.S. Treasury