Define: Risk-free Rate Of Return

UK Accounting Glossary

Definition: Risk-free Rate Of Return



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Full Definition of Risk-free Rate Of Return


The return an investor can expect to receive on a totally risk-free asset is referred to as a risk-free rate of return. The risk-free rate of return exists in theory but not in practice because every investment involves some element of risk. The yield on three-month US Treasury Bills is often used as a proxy for the risk-free rate of return since treasury bills are generally considered the least risky investment. The risk-free rate of return plays an important role in modern portfolio theory which argues that the risk-free rate of return is the minimum return investors will accept on their investment. As compensation for higher risk, investors demand the risk-free rate of return plus a premium on riskier assets.


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Definition Sources


Definitions for Risk-free Rate Of Return are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 6th February 2020.