Question

A risk free asset is an asset with

Select one:

a. A variance of -1

b. A variance of 0

c. A variance of 1

d. None of the above

Answer 1

Since a risk-free asset has a certain future return and the return of risk-free assest does not vary much or if it varies, then its variation is close to 0. The example of risk-free assests is Treasuries. Treasuries are said to be risk-free because they are backed by the U.S. government. This is safe because the return on risk-free assets is very close to the current interest rate.

Hence it can be said that a risk-free asset is an asset with the variance of 0. It means the return on risk-free assets does not vary.

Hence option b is the correct answer.

Option b; A variance of 0.