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Finance GlossaryRisk-Free Rate of Return
Risk-Free Rate of Return
Definition of Risk-Free Rate of Return
The Risk-Free Rate of Return is the return an investor can expect with almost no risk. Usually, such returns come from government securities like Treasury bills. These assets come with minimal risk of defaulting. The risk-free rate of return serves as a standard based on which other investments are evaluated. Any additional return expected is the compensation for taking additional risk.
Related Terms
Equilibrium Price
Equilibrium price is achieved when the demand is exactly equal to the supply. It is a state where buyers and sellers have enough goods and services to meet each other’s demands - not more, not less. One could say that equilibrium price is a perfectly balance state in the market.
Floating Interest Rate
The rate of interest that changes across the tenure of a loan, generally every quarter, due to the government’s interest rate, market conditions, and other factors is known as a floating interest rate.
Personal loans and home loans are typical examples of borrowing that carry a floating interest rate. A point to note here: the floating interest rate is added on top of a base interest rate that is charged by lenders.
Personal loans and home loans are typical examples of borrowing that carry a floating interest rate. A point to note here: the floating interest rate is added on top of a base interest rate that is charged by lenders.
Benchmark
A benchmark is a standard used by investors to compare the performance of a stock, commodity, or other securities.
Stock indices like Nifty 50, Sensex, Nifty Bank, and others are often used as benchmarks to evaluate the performance of one or more stocks.
The onset of a bear market is generally in tandem with poor economic conditions.
Benchmarks are not just used for evaluating markets or securities, they can also be used to assess the performance of an investor or wealth manager. Here are some outcomes if the returns are:
Stock indices like Nifty 50, Sensex, Nifty Bank, and others are often used as benchmarks to evaluate the performance of one or more stocks.
The onset of a bear market is generally in tandem with poor economic conditions.
Benchmarks are not just used for evaluating markets or securities, they can also be used to assess the performance of an investor or wealth manager. Here are some outcomes if the returns are:
- Greater than benchmark: the asset is doing considerably well (great)
- Same as benchmark: the asset is moving with the market (okay)
- Less than benchmark: the asset is performing poorly (bad)
Sector Rotation
Sector rotation is an investment strategy where investors keep shifting their funds between sectors based on economic cycles or market trends. For example, defensive sectors tend to perform better during slowdowns. Cyclical sectors perform impressively during phases of growth. With strategic sector rotation, investors can manage risk while capitalizing on opportunities in different market conditions.
Quantitative Analysis
Quantitative analysis (QA) is the application of mathematical and statistical modeling, measurement, and research to understand and predict behavior in the financial markets. Quantitative analysts use complex mathematical models and algorithms to analyse trading opportunities, manage risk, and execute trades using large amounts of historical data and computational power, rather than qualitative factors such as management experience and company reputation.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements on a scale of 0-100. Readings above 70 signal overbought conditions, suggesting potential reversals, while below 30 indicates oversold levels. Traders use 14-period RSI to identify entry/exit points and confirm trends in stocks or indices.
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