What Is The Risk Free Rate?

Patrick Curtis

Reviewed by

Patrick Curtis WSO Editorial Board

Expertise: Investment Banking | Private Equity

The risk free rate is a key concept when valuing potential investments and balancing portfolios. It is simply the current interest rate paid on any investment deemed to be 'risk free' (i.e. US/UK/German government bonds, savings accounts etc.). All other forms of investment should pay a higher interest rate than these, or else it is not worth investing in them for the additional risk taken on. The risk free rate is used in the Capital Asset Pricing Model to value assets, and all portfolios should contain a certain percentage of money in risk-free assets as a means of diversification. Another way of thinking about the risk-free rate is that it is the absolute minimum return an investment should offer.

To learn more about this concept and become a master at bonds and fixed income, you should check out our Bond Course - Fixed Income (coming soon!).

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Patrick Curtis is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. He has experience in investment banking at Rothschild and private equity at Tailwind Capital along with an MBA from the Wharton School of Business. He is also the founder and current CEO of Wall Street Oasis This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.