Thursday, April 21, 2016

Risk-Free Interest Rate

Link to the wiki for Risk Free Rate FTR.  No mention of the relationship of this rate to savers here either.

The risk-free interest rate is highly significant in the context of the general application of modern portfolio theory which is based on the capital asset pricing model. 
The risk free rate is also a required input in financial calculations, such as the Black–Scholes formula for pricing stock options and the Sharpe ratio. Note that some finance and economic theories assume that market participants can borrow at the risk free rate; in practice, of course, very few (if any) borrowers have access to finance at the risk free rate. 
The risk free rate of return is the key input into the Cost of capital calculations such as those performed using the Capital asset pricing model. The cost of capital at risk then is the sum of the risk free rate of return and certain risk premia.

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