A riskless asset is an asset whose future performance is certain (in terms of a guaranteed return). A riskless asset does not expose its holder (investor) to market risk in terms of volatility as to price, rate, returns, repayment of principal amount, etc. However, the exposure to market risk, in all its different types, entails attachment of risk premium to such an asset. Riskless assets do not involve a credit risk and the possibility of experiencing price risks during periods of large selling volumes. The expected return on such assets correspond to the risk-free rate (RF). In other words, riskless assets have lower average returns than risky assets (due to the risk premium commensurate to the additional amount risk assumed by holders of risky assets).
The main examples of riskless assets include:
- Treasury securities (those issued by credit worthy governments), etc.
- Government bonds (particularly short-term bonds).
- Money market instruments.
- Savings account.
