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What is the ‘Risk-Free Rate of Return’?

The risk-free rate of return is the rate an investor can get on a risk-free asset at a given time.

It is usually the current yield on a 10-year treasury, which is backed by the full faith and credit of the US Government and is considered risk-free. The risk-free rate is used in several calculations and considerations in finance, to show what return can be earned in the current market environment without being exposed to any risk.

This rate is usually the 10-year treasury yield, since it is backed by the US Government and is seen as risk-free. The Sharpe Ratio, for instance, is used in evaluations of risk and reward, and it subtracts the risk-free rate from the return earned or expected on an asset, before comparing it to the amount of risk taken to determine if the risk was worth it.

Other concepts of risk-return efficiency price in the risk free rate as well, such as the Security Market Line, which has a y-intercept at the risk-free rate.

Keywords: risk tolerance, U.S. Treasuries, risk free rate, Security Market Line (SML), Sharpe Ratio, treasury yield, risk-free asset,