Risk Free Rate of Return

The risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate. Risk-free rate in most (developed) markets has, until recently, been synonymous with returns offered by government bonds, but since the onset of global financial crisis in 2008 and European sovereign debt crisis in 2010 government bonds, while in many cases still relatively safest, are not seen as risk-free anymore. In theory, the official interest rate is risk-free, as it denotes interest a central bank would pay on cash deposits, but in practice regular consumers cannot deposit their funds with central banks, and hence return on government bonds has been used instead.

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