What is the definition of a The Risk Free Rate?

The risk-free rate is a key concept when valuing potential investments and balancing portfolios. It is simply the current interest rate paid on any investment deemed to be 'risk-free' (i.e. US/UK/German government bonds, savings accounts etc.). All other forms of investment should pay a higher interest rate than these, or else it is not worth investing in them for the additional risk taken on.

The risk-free rate is used in the Capital Asset Pricing Model to value assets, and all portfolios should contain a certain percentage of money in risk-free assets as a means of diversification.