Risk-free asset

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 ?
The fund's return is equal to the return on a risk-free asset, market premium and the selection ability of the fund manager.
There are one risk-free asset and [m.sub.1] risky assets in the market.
European officials denounced the announcement as counterproductive and somehow politically motivated, but the rating agencies are merely catching up to the reality that sovereign debt is not a risk-free asset.
She said: "The US may be in the last throes of being a safe haven and the notion of the Treasury being a risk-free asset may die a slow death from here."
Moreover, we assumed that investors started trading with an even initial wealth allocation between the risky portfolio and the risk-free asset (27).
We assume that the investor invest his resources into a risk-free asset and N risky assets.
Individuals must decide how much of their wealth they wish to allocate to a risk-free asset, [b.sup.i.sub.t], that earns a certain return, [r.sup.m], and a risky asset, [s.sup.i.sub.t], that earns a stochastic return, [[??].sup.s.sub.t] ([theta]), where [theta] denotes the state of nature.
To reach the conclusion, Northwestern students were given real money to make a series of investments, in each trial deciding how to allocate money between a risky and a risk-free asset.
Stanford professor emeritus and Nobel Prize winner William Sharpe agrees, advocating "a minimum subsistence level equal to the amount provided by a risk-free asset," adding annuities should be considered explicitly" for this role.