Risk free rate of return and Risk premium: Difference between pages

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(Rf).
1. ''Financial reporting - fair valuation.''


The theoretical rate of investment returns which can be earned on hypothetical investments which are considered to be risk-free for modelling purposes.
For financial reporting and fair valuation purposes, risk premium is  defined as additional compensation sought by rational risk-averse market participants for bearing the uncertainty inherent in the cash flows of an asset or a liability.


The Capital asset pricing model (CAPM) incorporates this type of risk free rate.
This is a similar concept to market risk premium in the Capital asset pricing model.




Historically, the rates of return on certain types of domestic central government debt were considered to be a close enough proxy for such hypothetical risk-free investments.
2.


In the modern era, domestic central government debt is no longer considered to be risk-free for this purpose, nor for a number of other purposes for which it was historically considered to be risk-free.
More broadly, value ascribed by any market participant to a reduction in uncertainty.


This value would not necessarily be the same for all market participants.


====Interest rate benchmarks====
The term 'risk-free rates' (RFRs) is also used in the context of interest rate benchmark rates.
For example, risk-free rates that might be used as alternatives to LIBOR.


== See also ==
*[[Capital asset pricing model]]
*[[Fair value]]
*[[Hurdle rate]]
*[[IFRS 13]]
*[[Market participant]]
*[[Market risk premium]]
* [[Premium]]
*[[Rational]]
*[[Risk appetite]]
*[[Risk averse]]
*[[Risk free rate of return]]
*[[Risk management]]


== See also ==
[[Category:The_business_context]]
* [[Benchmark]]
[[Category:Identify_and_assess_risks]]
* [[Capital asset pricing model]]
[[Category:Risk_frameworks]]
* [[Credit spread ]]
[[Category:Cash_management]]
* [[Gilts]]
[[Category:Financial_products_and_markets]]
* [[Interest rate risk]]
[[Category:Liquidity_management]]
* [[LIBOR]]
* [[Risk-free rates]]

Latest revision as of 18:00, 29 December 2022

1. Financial reporting - fair valuation.

For financial reporting and fair valuation purposes, risk premium is defined as additional compensation sought by rational risk-averse market participants for bearing the uncertainty inherent in the cash flows of an asset or a liability.

This is a similar concept to market risk premium in the Capital asset pricing model.


2.

More broadly, value ascribed by any market participant to a reduction in uncertainty.

This value would not necessarily be the same for all market participants.


See also