Risk-Free Rate Puzzle (RFRP)
An anomaly in the difference between the lower historic real returns of government bonds compared to equities. This puzzle is the inverse of the equity premium puzzle, and looks at the disparity from the perspective from the lower returning government bonds. Investopedia Says:
The risk-free rate puzzle is used to explain why bond returns are lower than equity returns by looking at investor preference. If investors tend to seek out high returns, why do they invest heavily in government bonds rather than in equities? If investors did invest in more equities, returns from equities would fall, causing the returns for government bonds to rise and making the equity premium smaller. Related Terms:
Anomaly
Capital Asset Pricing Model - CAPM
Consumption Capital Asset Pricing Model - CCAPM
Equity Premium Puzzle - EPP
Equity Risk Premium
Risk
Risk Averse
Risk Premium
Risk-Return Tradeoff |