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.
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.
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.
How does Fincanva handle it?
- 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.
- 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 shows for an instrument does not subtract it — see Sharpe ratio.
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, 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.