The risk-free rate is the short-term reference interest rate that risk-adjusted metrics subtract from a strategy's return, so that only the return earned above a near-riskless baseline counts as the reward for taking risk. It is the return you could have earned over the same period with essentially no risk, and it is the baseline the Sharpe ratio and Sortino ratio measure excess return against.
Also seen as: riskless rate, reference rate
How Fincanva sets the risk-free rate
Fincanva uses a real market-data series rather than a fixed number: the 3-Month US Treasury Bill secondary-market rate, published by FRED as the series DTB3. A short-term government bill is the standard textbook proxy for a near-riskless return, because you are almost certain to be repaid over such a short horizon.
The series is time-varying, so the rate is matched to your backtest's own date window and reported as the period average. When the DTB3 series is unavailable, or the date falls outside it in either direction, a fixed stand-in rate is used instead of failing the run. Fincanva does not publish that value.
Defaults in Fincanva
- The rate comes from the FRED
DTB3series (3-Month US Treasury Bill), a live market-data series — not a hardcoded constant. - It is matched to the first and last dates of your backtest and shown as the period average for that window.
- It feeds the excess-return term of the Sharpe ratio and the Sortino ratio: both subtract it before dividing by a risk measure.
Worked example
Suppose a strategy returns 8% over a year while the risk-free rate averaged 3% across the same window. Only the 5 percentage points above the risk-free rate are the reward for taking risk — the first 3% is a return you could have earned with essentially no risk at all. The Sharpe ratio divides that 5% excess by the strategy's volatility, so subtracting the risk-free rate is exactly what turns "total return" into "reward for the risk you took". A strategy that beat cash by a wide margin and one that barely beat it can post the same headline return but very different excess returns.
The risk-free rate shown is a historical average over your backtest's window, not a rate available to you now or a return you can count on. Fincanva provides no financial advice — see Is this financial advice?.
Where this term is used
Generated · 1 pagesThe pages that reference this term — so a term page is somewhere you pass through, not somewhere you land and stop.
Fincanva provides no financial advice. Backtests show what would have happened — not what will.
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