Risk-Free Asset

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Definition of 'Risk-Free Asset'

A risk-free asset is an investment that is expected to generate a certain return with no risk of financial loss. This is in contrast to a risky asset, which is an investment that could generate a higher return but also carries a higher risk of loss.

There are a few different types of risk-free assets. One common type is government bonds. Government bonds are issued by governments and are backed by the full faith and credit of the issuing government. This means that the government promises to repay the principal and interest on the bond, even if it experiences financial difficulties. As a result, government bonds are considered to be very low-risk investments.

Another type of risk-free asset is cash. Cash is considered to be risk-free because it is not subject to any market risk. The value of cash does not fluctuate, so there is no risk of losing money. However, cash does not generate any interest income, so it is not a good investment for long-term growth.

In addition to government bonds and cash, there are a few other types of assets that are sometimes considered to be risk-free. These include Treasury bills, municipal bonds, and bank deposits. However, these assets are not completely risk-free. There is always a small chance that the issuer of the asset could default on its payments, which would result in a loss for the investor.

Overall, risk-free assets are a good choice for investors who are looking for a safe place to store their money. These assets offer a low risk of loss and generate a steady stream of income. However, it is important to remember that no investment is completely risk-free.

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