riskless

Riskless is a term used to describe something that carries no risk of loss or uncertainty about its outcome. In finance, a riskless asset, or risk-free asset, is an investment expected to deliver a certain payoff with no default risk and negligible volatility over a given horizon.

In practice, the closest real-world approximations are government securities of high-credit-quality issuers, such as United States Treasury bills and bonds. Yet these instruments are not truly riskless: they are exposed to inflation risk, interest-rate risk, liquidity risk, and, when measured in a foreign currency, currency risk. The designation of risklessness usually depends on the time horizon and the currency considered.

In theoretical finance, riskless assets are used as the baseline for pricing and valuation. The risk-free rate is the return on a hypothetical riskless asset and serves as a key input in models such as discounted cash flow analysis and option pricing. In the arbitrage framework, the absence of riskless profit opportunities relies on a known risk-free return.

Limitations: no real asset is truly riskless; even government securities can lose real value due to inflation. Credit risk, political risk, and liquidity constraints can arise, and transaction costs and taxes can erode riskless returns. The term is mainly used as a simplifying assumption in models.

See also: risk-free rate, risk premium, arbitrage, option pricing, government bond.