Risk-free asset

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Risk-free asset

An asset whose future normal return is known today with certainty.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
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. We employ a WIBOR's bid, as a proxy for its yield.
where: [bar.R[P.sub.i]] is the average return of fund i, [bar.R[F.sub.i]] is the average return of risk free asset i and [[beta].sub.i] is the measure of market or systematic risk i.
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.
He introduced the concept of risk free asset. Combing the risk free asset with the Markowitz efficient portfolio he introduced the capital market line as the efficient portfolio line.
where [[Alpha].sub.k] is the proportion of net worth that investor k places in risky assets, E([r.sub.m] - [r.sub.f]) is the expected difference between the return on the market portfolio of risky assets ([r.sub.m]) and the return on the risk free asset ([r.sub.f]), [[[Sigma].sup.2].sub.m] is the variance of the return on the market portfolio of risky assets, [C.sub.k] is Pratt's measure of relative risk aversion ([C.sub.k] = [-U[double prime]([W.sub.k])/U[prime]([W.sub.k])][W.sub.k]), and [W.sub.k] is investor k's wealth.
Poor legal structure models also intermingle passive assets that are risk free assets with operating risks in particular types of business (e.g.
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.

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