Questioning the Use of 90-Day Treasury Bill as a Risk-Free Asset: Evidence from Canada

Abstract

The choice of T-bill as a risk-free asset is flawed because it is unable to protect the investor against purchasing power risk which is the very risk that investing is all about. We use Canadian data from 1956 to 2013 to show that the T-bill returns barely keeps up with inflation. We also show that if investors hold their investment over long periods then common stock volatility has no significant negative impact on the investor’s return in the long term and the investor stands to gain from the premium of stock returns over T-bills or government bonds.