---
title: "Risk-free rate"
description: "The risk-free rate is the short-term reference interest rate that risk-adjusted metrics subtract from a strategy's return to isolate its reward for risk."
canonical_url: "https://fincanva.com/glossary/risk-free-rate"
last_updated: "2026-10-07"
md_url: "https://fincanva.com/glossary/risk-free-rate.md"
---

# Risk-free rate

The risk-free rate is the short-term reference interest rate that risk-adjusted metrics subtract from a [strategy](/glossary/strategy)'s return, so that only the return earned *above* a near-riskless baseline counts as the reward for taking risk.

**Also seen as:** riskless rate, reference rate

It is the return you could have earned over the same period with essentially no risk, and the baseline the [Sharpe ratio](/glossary/sharpe-ratio) and [Sortino ratio](/glossary/sortino-ratio) measure excess return against.

## 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](/glossary/backtest)'s own date window and reported as the period average.

## How does Fincanva handle it?

- The rate comes from the FRED `DTB3` series (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.
- Months of the window outside the series are filled with a flat 2% a year, blended into the period average.
- It feeds the excess-return term of the Sharpe ratio and the Sortino ratio: both subtract it, stand-in months included, before dividing by a risk measure.
- The **Sharpe** a [screener](/glossary/screener) shows for an [instrument](/glossary/instrument) does not subtract it — see [Sharpe ratio](/glossary/sharpe-ratio#does-the-screeners-sharpe-subtract-the-risk-free-rate).

## What risk-free rate is used where the series has no data?

For any month of your backtest window that falls outside the DTB3 series — before its first observation or after its last — Fincanva uses a flat **2% a year** in its place, and the period average blends those months with the months the series does cover. A window that sits entirely outside the series is measured against 2% throughout. This stand-in belongs to the risk-free rate only: it is not the rate charged on borrowed money, which is set separately — see [interest-rate markups](/glossary/interest-rate-markups).

The stand-in covers dates outside the series, not a missing series. If the series itself could not be loaded, backtests would not run at all rather than run on an assumed rate.

## What does it look like in practice?

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](/glossary/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 is for education and illustration only. It is not personalised financial advice, and past or simulated results do not predict future ones. [Read the Terms Addendum](https://fincanva.com/terms/addendum#section-3)