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The yield you can earn without taking any risk. The baseline everything else is measured against.
Risk-free rate is the yield on a default-free, short-duration government security — typically the 3-month U.S. Treasury bill in U.S. analysis. Used as the baseline return investors could earn without taking risk, against which all risky returns are compared. Foliolytic uses actual daily 3-month T-bill yields from FRED, not a fixed 2% or 3% guess.
Rf = 3-month T-bill yield (annualized)There is no formula — the risk-free rate is a market-determined number you read off the daily Treasury auction or constant-maturity series.
The "risk-free rate" is the return you can earn with virtually zero default risk, locked in for a short period. For most analyses, the 3-month T-bill yield is the canonical proxy. Some analyses use 10-year Treasuries for long-horizon contexts, but those are not truly risk-free — they have substantial duration risk.
The risk-free rate matters enormously in high-rate environments. A "high-return" portfolio earning 6% in 2024 (when T-bills paid 5%) has almost no excess return — far less than the same 6% in 2021 (T-bills paid 0.05%).
In Jan 2025, the 3-month T-bill yield was approximately 4.3% annualized.
Any portfolio claiming "10% returns" in that environment is really claiming "5.7% excess returns above risk-free" — a much less impressive headline number.
Long-run average 3-month T-bill yield: ~3.3% nominal, ~0.3% real (after inflation). Recent ranges have included 0% (2009–2015, 2020–2022) and 5%+ (2023–2024).
Sharpe Ratio · Excess Return · Real Return · CPI (Consumer Price Index)
Short duration minimizes interest-rate risk. 3-month is short enough to be "risk-free" but long enough to avoid the noise of overnight rates.
Some analyses do, but the 10-year carries substantial duration risk — it is not truly risk-free. Foliolytic uses 3-month consistently.
FRED daily series for 3-month constant-maturity T-bill yields. Matched to your portfolio's date range.
Risk-free rate can be slightly negative (as in some European countries 2014–2022). Sharpe and excess return calculations work the same way; the baseline is just lower.
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