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 ?
We estimate risk-free value based on the residual income model, analysts' forecasts of earnings, and prevailing risk-free rates of return.
To measure the discount for risk implicit in share prices, we first compute risk-free value based on the residual income model using book values of equity, analysts' consensus expectations of future earnings, and prevailing risk-free rates of return.
We develop a new accounting-based measure of the effect of risk on share price, using the difference between observed share price and risk-free value, measured using the residual income model and risk-free rates of return.
b) We use the residual income model, risk-free rates of return, and Equation (2) to compute risk-free value.
7) Our proxies for risk-free rates of return are the yields on ten-year U.
Finally, due consideration should be afforded to rates of return prevailing in the market, including risk-free rates of return, stock and money market conditions, and so on.
5 Observation of their autocorrelation functions indicated that both time series of real risk-free rates of return were stationary.
Risk-free rates of return are calculated from a proxy for a riskless asset, such as U.
This disparity has confounded measurement of the relationship among timber, market, and risk-free rates of return.
To clarify the empirical implications of the two approaches to measuring the CAPM's explanatory variables, we used first and second calendar year market and risk-free rates of return to estimate the CAPM for rates of change in eleven of the series of annual-average sawtimber stumpage prices analyzed by Redmond and Cubbage (1988): bid prices for Douglas fir, western hemlock, ponderosa pine, southern pine, mixed hardwoods, maple, and oak sold from national forests (Ulrich 1987);(2) and prices for southern pine, ash, gum, and oak sold from private land in Louisiana (Ulrich 1987).
The different calendar years for measuring market and risk-free rates of return produced contrary estimates of the systematic risk of forest assets.
i,t + 1,j] with the righthand side of equation [8], we obtain: [13] [Mathematical Expression Omitted] Simplification and expression in CAPM risk premia form produces: [14] [Mathematical Expression Omitted] The CAPM thus specifies a relationship between the rate of change in the arithmetic mean of asset value and the weighted arithmetic mean of true market and risk-free rates of return, where the weights are the ratios [P.