The rate of return on some risk-free asset. In practice, analysts use government bond rates as a proxy for the risk-free rate. Some use T-bill rates, arguing that the shorter duration and lower correlation of the T-bill with the stock market help quell all or most of risk elements in this rate. Others use the LIBOR curve as a proxy for the riskless rate.
However, because T-bill rates (whose maturities typically range between one week and one year) are more sensitive to supply/ demand swings, regulatory intervention, and yield curve inversions, T-bills do not provide a faithful estimate of long-term inflation expectations, and do not account for the return required for long holding periods.
For long-term assets, the most appropriate riskless rate is estimated using longer-term government bonds. These bonds reflect long-term inflation expectations, feature lower volatility levels and are priced in a liquid asset. Nonetheless, long-term government bonds are more susceptible to systematic risk, and therefore may require some tweaks to unlever the risk-free rate with a Treasury beta.
Needless to say, the riskless rate (risk-free rate) is lower than the expected return on any risky asset.
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