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A risk-free asset is an investment that is considered to carry no risk of financial loss, typically because it is backed by a government or institution with a high credit rating. In theory, a risk-free asset generates a guaranteed return with no risk of default. The most common example of a risk-free asset is a government bond issued by a stable country, such as U.S. Treasury bonds. Risk-free assets are often used as benchmarks in finance to measure the performance of riskier investments.
U.S. Treasury bonds are considered risk-free assets because they are backed by the U.S. government, which is unlikely to default on its debt obligations.
• An investment that carries no risk of financial loss or default.
• Common examples include government bonds from stable countries.
• Used as a benchmark for evaluating the performance of riskier investments.
They are backed by the full faith and credit of stable governments, making the risk of default extremely low.
They serve as benchmarks for comparing the returns of riskier assets, helping investors evaluate the risk-adjusted performance of investments.
The risk-free rate represents the return on a risk-free asset, serving as a baseline for calculating the required return on riskier investments.
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