Risk-free asset is one where the investor know the expected return with certainty.
Two conditions have to be met:
- There can be no default rate, which generally implies that the security has to be issued by a government
- There can be no uncertainty about reinvestment rates, which implies that there are no intermediate cash flows.
- The logical consequence for valuations, where cash flows stretch out over long periods (or to infinity, is that the risk-free rates used should almost always be long-term rates
- In most cases, there is usually a 10-year government bond rate that offers a reasonable measures of the risk free rate
Government Securities Market - 6.90 GS 2019: 7.9330% - 7.9973%
Source: rbi.org.in
