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.

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.

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.

References in periodicals archive ?
The Group has successfully delivered on its 'Vision in Action' profitability and solvency targets, recording across the course of this plan an average normalized Return on Equity of 9.5% or 876 bps over the risk-free rates, and an average solvency ratio of 219%, in the upper part of the optimal solvency range.
Similar risk-free rates had already been developed for major currencies in other monetary jurisdictions, he noted.
Lower risk-free rates and house prices also impacted its solvency position, the firm said.
The loan is the first in the pilot the bank is running with a small number of customers, before launching the product to the wider market later this year in response to calls from the Financial Conduct Authority (FCA) to accelerate the transition away from LIBOR (London Interbank Offered Rate) to Risk-Free Rates by the end of 2021.
Quarles speaks again on "Progress on the Transition to Risk-Free Rates" from 11:50 ET (Wednesday).
The firm reported investment losses of approximately USD222m mainly because of risk-free rates and mainly in the US.
Frankfurt am Main: Member of the Executive Board of the ECB Benoit Coeure delivered a speech at the first meeting of the Working Group on Euro Risk-Free Rates, at the ECB.
In other words, the yield differential observed at the top of this page was largely accounted for by the difference between the Euro and dollar risk-free rates, which was also the determinant of the cost of (or gain from) currency hedging.
They also noted that in many crises the government bonds (that were used to estimate risk-free rates) have lost their values (because of high inflation or refusal to pay off the debt).
Because the ERP is the difference between expected stock returns and the risk-free rate, a high estimate can be the result of expected stock returns being high or risk-free rates being low.
Benchmark administrators should consult on changes to calculations by the end of next year, while regulators should aim to shift derivatives contracts over to the risk-free rates by the first half of 2016.
A higher variance of innovations to future consumption growth increases the variance of returns on the wealth portfolio and, hence, of the pricing kernel, leading to a higher equity premium and lower risk-free rates. Therefore, time variation in the variance of long-run growth ("long-run risk") can be an important factor explaining the variance in risk premia observed in the data.