How Risk Free Is The Risk-Free Rate Of Return?
The risk-free rate of return is one of the most basic components of modern finance and many of its most famous theories – the capital asset pricing model (CAPM), modern portfolio theory (MPT) and the Black-Scholes model – use the risk-free rate as the primary component from which other valuations are derived. The risk-free asset only applies in theory, but its actual safety rarely comes into question until events fall far beyond the normal daily volatile markets. Although it’s easy to take shots at theories that have a risk-free asset as their base, there are limited options to use as a proxy.
