Risk-free asset

[archived_user]

This question came up during my conversation with my Uncle. Generally, we say that investors expect to be compensated for the risk we take. So, if the asset is risk-free, then our return should be, theoretically, zero. Correct? What’s wrong with this rationale? Any help?
Moreover, this page (https://en.wikipedia.org/wiki/Risk-free_interest_rate) does talk about different interpretations for “risk-free”, I am not sure what CFA curriculum means by “risk-free.” So, I thought of asking this question. I’d appreciate any thoughts.

 

[archived_user]

At the very least, you should earn the expected rate of inflation, not zero.

 

[archived_user]

Thanks S2000magician. However, if that’s true, why do we use T-bills as risk-free asset (and not inflation) in portfolio theory. I am assuming that T-Bill’s rate of return < rate of inflation. For instance, currently 1-year Treasury rates are < 0.8% (https://www.treasury.gov/resource-center/data-chart-center/interest-rate...) but inflation is about 1.1% (http://www.usinflationcalculator.com/inflation/current-inflation-rates/).
I’d appreciate your thoughts and thanks in advance.

 

[archived_user]

In the real world, there is no true risk-free asset. The best approximation we can achieve is to use an asset with a time horizon close to our investment horizon, which is essentially default-free: hence, government bonds. Realize that it’s just an approximation, and don’t dwell on the minor inconsistencies.