What are the Limitations of Using the Risk-Free Rate?
While the risk-free rate is a useful benchmark, it has some limitations:
Theoretical Concept: In reality, no investment is entirely risk-free, even government bonds. Currency Risk: For international investors, the risk-free rate in one country may not be applicable due to currency exchange rate fluctuations. Market Conditions: The risk-free rate can be volatile, especially during periods of economic instability, which may affect its reliability as a benchmark.