Risk-free rate

The rate of return earned on a risk-free asset. This is a crucial component of modern portfolio theory, which assumes the existence of both risky and risk-free assets. The risk-free asset is usually assumed to be a government bond, and the risk-free rate is the yield on that bond, although in fact even a treasury is not entirely without risk. In modern portfolio theory, the risk-free rate is lower than the expected return on the risky asset, because the issuer of the risky asset has to offer risk averse investors the expectation of a higher return to persuade them to forgo the risk-free asset.