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The theoretical return on an investment with zero risk of financial loss, typically represented by the yield on U.S. Treasury bills.
The risk-free rate serves as the foundation for pricing all other assets. Every investment should theoretically earn at least the risk-free rate; any additional return compensates for additional risk. When the 10-year Treasury yields 4%, stocks need to offer a higher expected return (equity risk premium) to attract investment. The risk-free rate is a key input in CAPM, the Sharpe ratio, and discounted cash flow models. A higher risk-free rate makes risky assets less attractive (future cash flows are discounted at a higher rate), which is one reason rising interest rates tend to hurt stock valuations, particularly for growth stocks.