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.
References in periodicals archive ?
London, Sept 14, 2012 - (ACN Newswire) - In these uncertain times private wealth management in Asia should revolve around safe haven, dollar based riskless assets, says Christian Menegatti, Managing Director & Head of Global Economic Research, Roubini Global Economics, USA.
In the absence of a bequest motive, both financial wealth and the implicit riskless assets (state pensions) are being depleted at similar rates.
Chief Investment Officer Alan Mudie argues that the traditional idea of portfolio management - based on the premise that riskless assets exist - has become obsolete.
However, this process makes no explicit reference to equilibrium in the market for riskless assets.
To reduce deposit risk, banks substituted riskless assets for loans.
Similarly, provisions of the Federal Reserve Act enabled banks to convert illiquid assets, such as loans, into riskless assets (deposits at the central bank) through the discount window and to complete payments using Federal Reserve credits.
It is shown that an unequal distribution of savings can lead to a rise in the proportion of risky to riskless assets held by banks, increasing the chance of bank failure.
Equation (5[prime]) states that under risk neutrality, the price ratio of two riskless assets predicts the rate of change in exchange rates when opportunities for arbitrage profit cease to exist.
The offsetting payoff profiles for a short position in risky assets or risky securities is: buy forwards or futures, increase long positions in assets, long a call plus short a put, or increase the ratio of risky assets to riskless assets.
As discussed above, we require a delta-hedging portfolio consisting of risky and riskless assets to replicate the terminal value of the fund.
4) Note that the price ratio of two nominal riskless assets (below) is not a predictor of the expected rate of change in exchange rates, unless exchange rates and domestic risk adjustment factors are independent or investors are risk-neutral.
Assumption 3: The insurer invests in riskless assets only.