What Is a Risk-Free Asset?

A risk-free asset is one that has a certain future return—and virtually no possibility of loss. Debt obligations issued by the U.S. Department of the Treasury (bonds, notes, and especially 澳洲幸运5官方开奖结果体彩网:Treasury bills) are considered to be risk-free because the "full faith and credit" of the U.S. government backs them. Because they are so safe, the return on risk-free assets is very close to the current 澳洲幸运5官方开奖结果体彩网:interest rate.

Many academics say that, when it comes to investing, nothing can be 100% guaranteed—and so there's no such thing as a risk-free asset. Technically, this may be correct: All 澳洲幸运5官方开奖结果体彩网:financial assets carry some degree of danger—the risk they will drop in value or become worthless altogether. However, the level of risk is so small that, for the average investor, it is appropriate to consider 澳洲幸运5官方开奖结果体彩网:U.S. Treasurys or any government debt issued 𝄹by a from stable Western 🌸nation to be risk-free.

Understanding a Risk-Free Asset

When an investor takes on an investment, there is an anticipated return rate expected depending on the duration the asset is held. The risk is demonstrated by the fact that the 澳洲幸运5官方开奖结果体彩网:actual return and the anticipated return may be very different. Since market fluctuations can be hard to predict, the unknown aspect of the fuඣture return is considered to be the risk. Generally, an increased level of risk indicates a high🌟er chance of large fluctuations, which can translate to significant gains or losses depending on the ultimate outcome.

Risk-free investments are considered to be reasonably certain to gain at the level predicted. Since this gain is essentially known, the 澳洲幸运5官方开奖结果体彩网:rate of return is often much lower to reflect the lower amount of risk. The 澳洲幸运5官方开奖结果体彩网:expected return💯 and actual return are likely to be about the same.

While the return on a risk-free asset is known, this does not guarantee a profit in regards to 澳洲幸运5官方开奖结果体彩网:purchasing power. Depending on the length of time until maturity, 澳洲幸运5官方开奖结果体彩网:inflation ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚcan cause the asset to lose purchasing power even if the dollar value has risen as predicted.

Risk-Free Assets and Returns

澳洲幸运5官方开奖结果体彩网:Risk-free return is the theoretical return attributed to an investment that provides a guaranteed return with zero risk. The risk-free rate represents the interest on an investor's money tha🉐t would be expected from a risk-free asset when invested over a specified period of time. For example, investors commonly use the interest rate on a three-month U.S. T-bill as a proxy for the short-term risk-free rate.

The risk-free return is the rate against which other returns are measured. Investors that purchase a security with some measure of risk higher than that of a risk-free asset (like a U.S. Treasury bill) will naturally demand a higher level of return, because of the greater chance they're taking. The difference between the return earned and the risk-free return represents the 澳洲幸运5官方开奖结果体彩网:risk premium on the security. In other words, the return on a risk-free asset is added to a risk prem💮ium to measure the total expected return on an investment.

Reinvestment Risk

While they're not risky in the sense of being likely to default, even risk-free assets can have an Achilles' heel. And that's known as 澳洲幸运5官方开奖结果体彩网:reinvestment risk.

For a long-term investment to continue to be risk-free, any reinvestment necessary must also be risk-free. And often, the exact rate of return may not be predictable from the beginning for t𒁏he entire duration of the investment.

For example, say a person invests in six-month Treasury bills twice a year, replacing one batch as it matures with another one. The risk of achieving each specified returned rate for the six months covering a particular Treasury bill's growth is essentially nil. However, interest rates may change between each instance of reinvestment. So the rate of return on the second Treasury bill that was purchased as part of the six-month reinvestment process may not be equal to the rate on the first Treasury bill purchased; the third bill may not equal the second's, and so on. In that regard, there is some risk over the long term. Each individual T-bill's return is guaranteed, but the rate of return over a decade (or however long the investor pursues this strategy) is not.