The return on an investment with no default risk, usually proxied by a government bill. It is the base from which risk premiums are measured.
Where you will meet it
Risk-free rate comes up in 48 learning outcome notes across the FRM syllabus.
A few of them:
Introduction to Derivatives FRM Part I · Financial markets and products
“Here S is the spot price, r the annual risk-free rate with annual compounding and T the time in years.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“The measure is Sharpe ratio = (portfolio return − risk-free rate) ÷ σ.”
Country Risk: Determinants, Measures, and Implications FRM Part I · Valuation and risk models
“A sovereign credit spread is the yield on its bond over the risk-free rate in the same currency, for example a USD sovereign bond over the US Treasury.”
Introduction to Credit Risk Modeling and Assessment FRM Part II · Credit risk measurement and management
“Let σ be the asset volatility and r the risk-free rate.”
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