From the course: Corporate Finance Foundations
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Risk-free rate
From the course: Corporate Finance Foundations
Risk-free rate
- The risk-free rate is another component of the famous Capital Asset Pricing Model. The risk-free rate represents the return an investor would expect from an absolutely risk-free investment over a specific period of time. The risk-free rate is useful in helping a potential investor compute how much return to expect for a given level of risk. In other words, for an investment option bearing no risk, there's an expected rate of return. The risk-free rate. For a given level of risk, how much return over and above the risk-free rate would an investor require? Now, the risk-free rate is the starting point in this computation. Adding more risk results in a higher expected rate of return. The risk-free rate, it's the baseline. Let's imagine that I've been asked to loan $1 to the most trustworthy organization on the earth. I don't know who that is, but let's just imagine them. The most trustworthy organization on Earth. They're sure they're going to pay me back. What interest rate would I…
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