Risk-Free Rate Of Return

  

Categories: Bonds, Metrics

See: Risk-Free Asset. See: Treasury Bill. See: T-Note.

The risk-free rate of return is the very low investment return investors get for taking no risk, in most examples, via buying U.S. Government-backed "paper," or bonds.

They're backed by the "full faith and credit" of Uncle Sam to tax his hard-working citizens and pay his debts like a Lannister. So that risk-free rate is whatever the rate is that the regular Treasury auctions yield, i.e. the rate at which investors in Government paper are willing to receive in order to give Uncle Sam cash to run his bidness.

See: Spread to Treasuries to get a sense for how the process works.

Related or Semi-related Video

Finance: What are Systematic and Unsyste...14 Views

00:00

finance a la shmoop what are systemic and unsystematic risk systemic risks are

00:09

just endemic to the market want to invest in the stock market and compound [Plate of vegetable appear]

00:13

return your way into great wealth great but then you'll suffer the normal risk

00:19

of the system that risk specifically is this yeah best of times worst of times

00:25

but up over time the market goes up you just have to embrace the notion that [Man hugging a tree]

00:31

there is systemic risk in that in the short run you can buy an S&P 500 index

00:36

fund here then lose like a third or whatever of your money in not too many

00:41

years but if you don't panic and sell just at the wrong time here right out

00:45

the storm and keep going well then you should be just fine by the time you

00:49

arrive here so that's risk that is always in the system equities rise and [Equity in the ocean]

00:55

fall like the tides or something like that but generally they rise and if you

01:00

want to swim in this bathtub well you get used to the turbulence and have an [Girl swimming against the tide]

01:04

airsick bag handy all right that systemic risk or systemic risk

01:08

what's unsystematic risk well it's bad investors or rather bad investing it's

01:14

panicking and selling your stock just when you should be doubling down its

01:18

buying lousy companies thinking that they're cheap today but not realizing [Woman runs away from smelly girl]

01:23

that they will always be cheap because they're lousy or in a lousy industry or

01:27

run by lousy management it's buying into lousy industries that also look cheap

01:31

but are dying hello paper and pulp is yeah anyone really think that's gonna be [Paper printing]

01:35

around in 20 years all right well it's believing the dreamy hopes and prayers

01:39

of future earnings and trusting that there really will be 5 million [Traffic on the highway]

01:43

driverless cars on the road in 3 years you know good luck with that we'd love

01:48

it to be true but ain't gonna be unsystematic risk is also investing in

01:52

bonds for the long-term taking very little risk when taking little risk is

01:57

the opposite of what you should be doing when you're a young investor so yeah

02:01

systematic and unsystematic risk both exist plentifully and both can bite you [Dog bites portfolio from woman]

02:06

right in the portfolio so you got to know what both are and embrace them

02:11

for what they're worth

Up Next

Finance: What is risk premium?
0 Views

What is risk premium? Risk premium is the amount of excess return or yield that a bond must pay in order to compensate for the additional default r...

Finance: What is a Risk Profile?
0 Views

What is a Risk Profile? A risk profile is an assessment of an individual’s or corporation’s tolerance for risks and volatility in making decisi...

Finance: What is market risk?
5 Views

What is market risk? Market risk refers to outside events that can move the markets into above average volatility due to fears over unquantifiable...

Find other enlightening terms in Shmoop Finance Genius Bar(f)