when an investor takes on an investment there is an anticipated return rate expected depending on the duration the asset is held the risk is demonstrated by the fact that the actual return and the anticipated return may be very different since market fluctuations can be hard to predict the unknown aspect of the future return is considered to be the risk generally an increased level of risk indicates a higher chance of large fluctuations which can translate to significant gains or losses depending on the ultimate outcome 
risk free investments are considered to be reasonably certain to gain at the level predicted since this gain is essentially known the rate of return is often much lower to reflect the lower amount of risk the expected return and actual return are likely to be about the same while the return on a risk free asset is known this does not guarantee a profit in regards to purchasing power depending on the length of time until maturity inflation can cause the asset to lose purchasing power even if the dollar value has risen as predicted risk free assets and returnsrisk free return is the theoretical return attributed to an investment that provides a guaranteed return with zero risk the risk free rate represents the interest on an investor s money that would be expected from a risk free asset when invested over a specified period of time for example investors commonly use the interest rate on a three month u s t bill as a proxy for the short term risk free rate the risk free return is the rate against which other returns are measured investors that purchase a security with some measure of risk higher than that of a risk free asset like a u s treasury bill will naturally demand a higher level of return because of the greater chance they re taking the difference between the return earned and the risk free return represents the risk premium on the security in other words the return on a risk free asset is added to a risk premium to measure the total expected return on an investment reinvestment riskwhile they re not risky in the sense of being likely to default even risk free assets can have an achilles heel and that s known as reinvestment risk for a long term investment to continue to be risk free any reinvestment necessary must also be risk free and often the exact rate of return may not be predictable from the beginning for the entire duration of the investment for example say a person invests in six month treasury bills twice a year replacing one batch as it matures with another one the risk of achieving each specified returned rate for the six months covering a particular treasury bill s growth is essentially nil however interest rates may change between each instance of reinvestment so the rate of return on the second treasury bill that was purchased as part of the six month reinvestment process may not be equal to the rate on the first treasury bill purchased the third bill may not equal the second s and so on in that regard there is some risk over the long term each individual t bill s return is guaranteed but the rate of return over a decade or however long the investor pursues this strategy is not 