risk-free return

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Risk-Free Return

The return on any investment with such low risk that the risk is considered to not exist. A common example of a risk-free return is the return on a U.S. Treasury security. The risk-free return exists in order to compensate the investor for the temporary tying up of his/her capital, even though it is not put at risk. See also: Capital Allocation Line, riskless investment.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

risk-free return

The annualized rate of return on a riskless investment. This is the rate against which other returns are measured. See also excess return.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

Risk-free return.

When you buy a US Treasury bill that matures in 13 weeks, you're making a risk-free investment in the sense that there's virtually no chance of losing your principal (since the bill is backed by the US government) and no threat from inflation (since the term is so short).

Your yield, or the amount you earn on that investment, is described as risk-free return. By subtracting the risk-free return from the return on an investment that has the potential to lose value, you can figure out the risk premium, which is one measure of the risk of choosing an investment other than the 13-week bill.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
In order to stimulate the economy and in the wake of declining inflation, SBP kept reducing the discount rate to encourage private sector credit, which otherwise was being invested in Treasury Bills earning a risk free rate of return. The current discount rate is stable at 10 percent, which have been increased once again in consecutive monetary policy decisions.
where: k - rate of return expected by capital donors and at the same time (from organization's perspective) - organization cost of financing capital rate, [k.sub.e] - for capital coming from owners (cost of fund capital rate), [k.sub.M] - for average rate of return on typical investment on the market, [k.sub.RF] - for risk free rate of return whose approximation is an average profitability of Treasury bills in the country where the investment is made.
In principle, cost of equity consists of the risk free rate of return and the premium expected for risk which investors could incur when investing in company's equity.
The second graph of Figure 9 shows that under all the three conditions when the riskfree rate of return increases the individual reduces life insurance purchases, though at different speeds--faster under Case 2 (when the stock return is fixed ) than under Case 1 (when stock return increases with the risk free rate of return).
Here, S is the current stock price, N([d.sub.1]) and N([d.sub.2]) represent cumulative probability distributions, K is the option strike price, r is the risk free rate of return, t is the fraction of the year remaining until expiration and a is the standard deviation of the annual rate of return on the underlying security.
In a similar way you can analyze an investment project by substituting the expenditures required for the investment for the exercise price, the value of the assets that will be acquired in making the investment for the stock price, the length of time the investment may be deferred as the time to expiration for the option, the risk of the investment as the variance of returns on stock, and the time value of money for the risk free rate of return.
The required level of return on common stock portfolios should obviously be higher than the risk free rate of return in the economy offered by the government securities.
In order to stimulate the economy and in the wake of declining inflation, SBP kept reducing the discount rate to encourage private sector credit, which otherwise was being invested in Treasury Bills earning a risk free rate of return. Despite reduction in rates, banks are not actively advertising their products and still find comfort in risk free money market investments and the fact that customers will themselves approach banks to take advantage of low interest rates.
where: k - rate of return expected by capital donors and at the same time (from nonprofit organization perspective)--cost of financing capital rate, [k.sub.]-for cost rate of the equity, [k.sub.m]-for long term debt rate, [k.sub.ds]-for short term debt rate, [k.sub.m]-for average rate of return on typical investment on the market, [k.sub.RF]-for risk free rate of return whose approximation is an average profitability of treasury bills in the country where the investment is made.
In order to stimulate the economy and in the wake of declining inflation, SBP reduced the discount rate to encourage private sector credit which otherwise was being invested in Treasury Bills earning a risk free rate of return. The current discount rate is 9.5 percent.

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