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What is a risk free asset?

Risk free asset

Although all investments carry some degree of risk, the term risk free is used to describe assets that are considered to be sufficiently safe that investors can be reasonably certain in expecting a return on their investment that is similar to the return predicted.

Where have you heard about risk free assets?

Treasury bills and bonds from stable governments are often described as risk free assets because they are backed by the government and, as such, considered safe. On the other hand, as the eurozone debt crisis progressed in 2012, the perception of these assets as risk-free was threatened by headline-grabbing levels of soaring public sector debt in what many felt were relatively secure, developed countries.

What you need to know about risk free assets.

The extent of risk in an investment is related to the perceived probability that the actual return could differ from the expected return, and the extent to which it may differ.

In risk-free investments, the expected return and actual return are likely to be about the same. On the other hand, because they involve less risk, the rate of return for these types of assets is often much lower.

Although you can be reasonably certain that a risk-free asset will return as predicted, that doesn't necessarily guarantee a profit in terms of purchasing power. High levels of inflation may mean that the value of the investment, in terms of the equivalent amount of goods or services you could purchase with the return, has decreased by the time the investment reaches maturity.

Find out more about risk free assets.

In comparison to risk free assets, risk assets carry a degree of risk because they're subject to a significant degree of price volatility.

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