Friday, January 13, 2012

What Risk Free Rate Of Return 2012

What Risk Free Rate Of Return 2012 ; Risk-free interest is the rate of interest which exists when the expected risk of the economic transaction is zero. In most cases, the general interest rates in major banks of a country reflects the nominal interest rate, which is risk free. The real interest rate is simply the nominal interest rate minus the rate of inflation.

The risk-free interest rate is the theoretical rate of return of an investment with zero risk, including default risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a given period of time. The risk-free rate of return is one of the most basic components of modern finance and many of its most famous theories – the capital asset pricing model (CAPM), modern portfolio theory (MPT) and the Black-Scholes model – use the risk-free rate as the primary component from which other valuations are derived. The risk-free asset only applies in theory, but its actual safety rarely comes into question until events fall far beyond the normal daily volatile markets. Although it’s easy to take shots at theories that have a risk-free asset as their base, there are limited options to use as a proxy.

In theory, 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.whereas, In practice the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.

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