Risk Free Asset

By: Ankit Mittal

 Features of Risk Free Assets

 Absence of Default Risk & Interest Risk

 Full payment of Principal & interest

amount.
The Return from risk free asset is certain & the
standard deviation of the return is nil. The
relationship between the rate of return of the risk
free asset & risky asset is 0. These types of
assets are usually fixed income securities. But
fixed income securities issued by private
institutions have the chance of default. If the
fixed income securities are from government,
they do not possess the default risk & the return
from them are guaranteed. Further, the govtt.
issues Securities of different maturity period to
match the length of investors holding period. The
risk free assets may be govtt. Securities,
treasury bills & Time deposits in banks.
 Inclusion of Risk Free Asset
Now, the risk free asset is introduced &
investor can invest part of his money on
risk free asset & remaining amount on the
risky asset. It is also assumed that the
investor would be able to borrow money at
risk free rate of interest. When risk free
asset is included in the portfolio, the
feasible efficient set of the portfolios is
altered. This can be explained in the Fig.
 Efficient Frontier with Borrowing & Lending
R

Borrowing

R
Lending

O P