Economics Risk And Return Questions Medium
The risk-free rate of return is determined by considering the return on an investment that is considered to have no risk of default or loss. In most cases, the risk-free rate is based on the yield of a government bond, typically a Treasury bond, as these are considered to have the lowest risk of default. The risk-free rate is influenced by various factors such as inflation, monetary policy, and market conditions. Central banks play a crucial role in determining the risk-free rate by setting the benchmark interest rate, which affects the overall cost of borrowing and lending in the economy. Additionally, market participants also consider the term structure of interest rates and the expected future path of interest rates when determining the risk-free rate.