the two components of risky return (u) in the total return equation are The
risk-free rate (RF) and the risk premium.
The risk-free interest rate is the rate of return earned by an investment that does not bear any risk. The risk-free rate is something of a theoretical concept because all assets, no matter how small, carry risk. In practice, it is considered the interest paid on short-term government debt.
The risk-free interest rate value is calculated by subtracting the current rate of inflation from the total return on government bonds over the investment period. For example, a government bond yields 2% over 10 years. In that case, the investor should consider 2% as a risk-free return.
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