The free risk rate of return and factors that affect its assessment

Abstract

The cost of capital is a key variable in the financial analysis because it provides adequate assessment of the value of capital, and the value of individual securities. Hence, the important question is how to determine the cost of capital. Initial basis for determining the cost of capital is a determining risk free rate of return that is subject of research in the paper. Risk free rate of return exists when the expected rate of return is known with certainty, that means that realized proceeds of an asset is equal to the expected yields of the same asset. Rate of return on that asset is characterized as risk-free rate of return. To be able to adequately determine the risk free rate of return is necessary to determine the factors affecting its value, such as the currency in which it is expressed risk free rate of return and inflation. Therefore, the paper explored the reasons that may lead to inadequate assessment of the risk free rate of return due to inadequate treatment of the impact of currency and inflation in the analysis.