Role in the CAPM equation The risk-free rate acts as the minimum rate of return, to which is added the excess return (that is, the beta multiplied by the risk premium of the shares). The stock risk premium (ERP) is calculated as the average market return (26P 500) minus the risk-free rate. The risk-free rate of return is the interest rate that an investor can expect to obtain on an investment that does not involve any risk. In practice, the risk-free rate is usually considered to be equal to the interest paid on a 3-month Treasury note, which is generally the safest investment an investor can make.
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