The risk-free rate of return is the potential return on a risk-free investment. Over a given length of time, the risk-free rate indicates the interest an investor would anticipate from a totally risk-free investment. By subtracting the current inflation rate from the yield of a Treasury bond with the same maturity as your investment, you can determine the true risk-free rate. In principle, the risk-free rate is the lowest return an investor may anticipate on any investment since they will not take on further risk until the prospective rate of return is higher than the risk-free rate. The investor’s home market must be considered when determining a proxy for the risk-free rate of return in a specific circumstance, and negative interest rates might further complicate the problem. In fact, however, there is no such thing as a fully risk-free rate because even the safest assets contain some risk.
Risk-free rate refers to the yield on top-quality government stocks. It is often called the risk-free interest rate. The risk-free rate of return is the minimum rate of return that can be expected or earned by the investor from an investment that bears zero risk.The risk-free benchmark, for the majority of investors, is the Treasury yield – other assets are measured against it. When an investment is risk-free, it means that the actual return that an investor obtains equals the expected return.