Measuring performance
Risk-free rate
The return available with essentially no risk of default, used as the baseline for every other return.
How it works
In practice it is the yield on short-dated government debt in the relevant currency. It is the hurdle every risky investment has to clear before the risk was worth taking.
It moves, and when it moves everything reprices. A world where cash pays 5% values a risky future cash flow very differently from one where cash pays nothing.
Where it misleads people
Risk-free means free of default risk, not free of all risk. A government bond held to maturity still exposes you to inflation, and sold before maturity to price risk.
Related terms
- Sharpe ratioReturn above the risk-free rate, divided by volatility — how much return each unit of risk bought.
- Equity risk premiumThe extra return investors expect from shares over risk-free government debt, for accepting the risk.
- Capital asset pricing modelA model saying an asset’s expected return depends on the risk-free rate plus its market risk.
- Treasury billVery short-term government debt, issued at a discount and repaying face value within a year.
- Discount rateThe rate used to convert future money into what it is worth today.
Mentioned in
More in Measuring performance
- Realised profit and loss
- Sortino ratio
- Real return
- Survivorship bias
- Price return
- Time-weighted return
- Performance attribution
- Total return
All 29 Measuring performance terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.