Since there is no risk associated with paying of debt this gives you a
high risk free return on your money.
The iassure endowment plan is a single premium option that ensures that the insured
gets risk free return along with coverage on life.
* Measures correlation between excess return and
risk free return of the Barclay's Aggregate U.S. Bond Index.
Stocks would crater because now you could get a 3 %
risk free return from Treasuries compared to a risky 3 % dividend yield from stocks.
Investment Objective: To
generate risk free returns through investments in sovereign securities issued by the Central and / or State Government (s) and / or reverse repos in such securities.
If they can make
good risk free returns at little or no cost why should they make higher risk loans to businesses, especially since underwriting loans costs money up front and some loans might not be repaid?
Only when you can get
a risk free return that is higher than the interest rate of your debt should you consider investing instead of paying of your debt.
*
Risk free return is the return that would be obtained if invested in a govt bond for the same duration as mutual fund.
Risk free returns (out of market) are based on 1 - month US treasury bill returns or the selected asset
The Sharpe ratio of an investment is (the average return of an investment in excess to
the risk free return) divided by the standard deviation of that investment.
Selling stocks when expected equity returns is lower
the risk free return is also logical, because there is no risk premium or in fact a negative risk premium.
Buying stocks when expected equity returns is higher
the risk free return is logical, because there is a risk premium.