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True or False: risk-free asset should provide a return of 0%. Explain. I know that the...

True or False: risk-free asset should provide a return of 0%. Explain.

I know that the answer is false. I just need to understand why a risk free rate is positive. Thank you.

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Answer #1

False

Explanation: Risk free rate does not mean zero return. It refers to a return which does not involve any risk . A risk free rate is positive because there are bodies who believe they can make higher return from the money than the return they offer you. In order to get the money to invest, they offer you a return which does involve any risk (i.e. risk free rate) , by backing it up with collateral and then invest the money to make higher returns for themselves. That is why risk free rate is positive.

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