Risk-free return
Risk-free return is the theoretical return on an investment assumed to have no default or other relevant uncertainty risk over a specified horizon.
Investing for Programmers
The risk-free rate is the theoretical return on an investment with no default or uncertainty risk, commonly approximated by government security yields.
- How it is used
- Uses a baseline return to compare risky assets and evaluate portfolio risk-adjusted performance.
- How deep it goes
- Defines the rate, distinguishes it from market averages, and applies it in Sharpe-ratio portfolio calculations.
- Examples
- Compares a 10-year US Treasury yield with Apple’s dividend yield and uses a 4.22% rate in portfolio simulation.
- What you can do after
- Apply via Python by inserting a risk-free rate into Sharpe-ratio and efficient-portfolio calculations.
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Build a Robo-Advisor with Python (From Scratch)
The risk-free rate is the return associated with an investment assumed to have no default risk over the relevant time horizon.
- How it is used
- Anchors portfolio construction by providing a zero-volatility asset for mixing with a tangent portfolio.
- How deep it goes
- Derives constrained optimal weights and related formulas, while separating deeper mathematical derivations into an optional appendix.
- Examples
- Uses one-month Treasury bills, ten-year bonds sold early, portfolio allocations, and a risk–reward plot.
- What you can do after
- Apply it via portfolio optimization equations and Python plotting to analyze risk-free and risky-asset combinations.
Read how Build a Robo-Advisor with Python (From Scratch) explains risk-free return →
Related concepts
- excess returnused by · An investment return measured above the return of a specified risk-free benchmark.
- capital asset pricing modelused by · The capital asset pricing model is a financial model that estimates an asset's expected return from the risk-free rate, market expected return, and the asset's sensitivity to market returns.
- Sharpe ratiouses · The Sharpe ratio measures an investment’s excess expected return over the risk-free rate per unit of return volatility.
- risk-free assetproduced by · A risk-free asset is an investment whose return over a specified horizon is assumed to be known with certainty and free from default risk.
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