What is considered the risk-free rate of return?

The risk-free rate of return is most commonly associated with the return on government bonds, specifically those issued by stable governments, such as U.S. Treasury bonds. This is because these bonds are considered virtually free of default risk; the government guarantees repayment of the principal and interest. Therefore, they provide a baseline for measuring the return of other investments, which come with higher risks.

Government bonds reflect the interest rate environment of the economy and are used as a standard benchmark when assessing the performance of other investments, adjusting for risk. This makes them an ideal proxy for the risk-free rate, as they represent the return an investor would expect with minimal risk.

In contrast, average market returns, high-risk investments, and real estate investments involve various levels of risk and uncertainty, and thus do not effectively represent a risk-free rate. Each of these alternatives comes with the potential for loss, which is why they cannot be categorized as risk-free.