Risk-free rate of return

The risk-free rate of return is the return expected from an investment that is considered to have zero risk of default. In practice, the 3-month Treasury Bill is assumed to have a risk-free rate of return. This rate of return establishes the minimum threshold for a rate of return on any investment, since an investor would logically invest in Treasury Bills rather than invest in anything else that offered a lower rate of return.

If a foreign investor is investing in Treasury bills, the associated risk-free rate could be somewhat different than the rate experienced by a United States investor, since the foreign investor also has to account for currency risk. In this situation, the investment may be impacted by fluctuations in the exchange rate.