Tuesday, April 05, 2011

Snippet: What is a risk-free return?

In this snippet I restrict the question to investment firms and investors. These firms and investors get capital at some expected rate of return. Thereafter, the firms use their knowledge and management skills to generate returns  on this capital. Ideally, the returns they generate are higher than those expected by providers of capital. Further, and let us read this carefully, the returns these firms generate are higher than returns they could generate through any other activity.

In such cases, Risk-free return is rate of return slightly higher than cost of capital for these firms.


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