Risk-free asset - Financial definition
Concise definition of the term risk-free asset
A risk-free asset is a financial instrument with a guaranteed return and virtually no risk of financial loss. Typically, government bonds of highly rated countries are considered risk-free assets.
Comprehensive definition of the term risk-free asset
In the context of finance, a risk-free asset is pivotal in portfolio management and the Capital Asset Pricing Model (CAPM), serving as a benchmark for comparing other investments. Practically, U.S. Treasury bonds are often deemed risk-free due to the low default risk of the U.S. government.
Market practices leverage these assets to establish a baseline return, aiding in the assessment of the risk premium of other securities. Despite the theoretical notion of being risk-free, these assets may still be subject to inflation and interest rate risks.