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What Is the Difference between a Risk-Free Rate and a Risk-Adjusted Rate?

Risk-free rate is zero-risk return; risk-adjusted rate is risk-free rate plus a premium for investment risk.
Greeks.Live16.11.25

What Is the Difference between a Risk-Free Rate and a Risk-Adjusted Rate?

The risk-free rate is the theoretical rate of return of an investment with zero financial risk, typically represented by the yield on short-term US Treasury bonds. The risk-adjusted rate is the risk-free rate plus a risk premium, which compensates the investor for taking on the specific risks of the investment (e.g. volatility, credit risk).

The risk-adjusted rate is the discount rate used in DCF to reflect the true cost of capital.

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