Risk free rate of return

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The theoretical rate of investment returns which can be earned on hypothetical investments which are considered to be risk-free for modelling purposes.

The Capital asset pricing model (CAPM) incorporates this type of risk-free rate.

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.

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.

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