Risk-free Rate

Definition

The risk-free rate is the theoretical rate of return of an investment with zero risk. It represents the interest an investor would expect from an absolutely risk-free investment. It is expressed as an annual percentage (e.g., 2.5% per year).

The PortfolioMetrics tool uses risk-free rate in the computation of certain metrics, such as the Sharpe ratio, which measures the risk-adjusted return of an investment.

The risk-free rate is typically based on the return of a government bond or a similar low-risk investment.