FRM Financial Risk Manager Practice Test

The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. In theory, it is the minimum return an investor expects for any investment because he will not accept additional risk unless the potential rate of return is greater than the risk-free rate.

Key Takeaway: In practice, the U.S. Treasury Bill is generally considered the risk-free alternative to any investment. For project based finance, one would typically use the rate of return for the T-bill with a similar length of investment. So if a project returns over 10 years, one would use the 10 year T-bill in the calculations.