Editing Risk-free rate (section)

==Application==
The risk-free interest rate is highly significant in the context of the general application of [[capital asset pricing model]] which is based on the [[modern portfolio theory]]. There are numerous issues with this model, the most basic of which is the reduction of the description of utility of stock holding to the expected mean and variance of the returns of the portfolio. In reality, there may be other utility of stock holding, as described by [[Robert J. Shiller]] in his article 'Stock Prices and Social Dynamics'.<ref>{{cite journal |title=Stock Prices and Social Dynamics |journal=Brooking Papers on Economic Activity |date=1984 |pages=457–511 |authorlink=Robert J. Shiller |first=Robert J. |last=Shiller|doi=10.2307/2534436 |jstor=2534436 |url=https://cowles.yale.edu/sites/default/files/files/pub/d07/d0719-r.pdf }}</ref>

The risk-free rate is also a required input in financial calculations, such as the [[Black–Scholes formula]] for pricing [[stock option]]s and the [[Sharpe ratio]]. Note that some finance and economic theories assume that market participants can borrow at the risk-free rate; in practice, very few (if any) borrowers have [[access to finance]] at the risk free rate.

The risk-free rate of return is the key input into [[cost of capital]] calculations such as those performed using the [[capital asset pricing model]]. The cost of capital at risk then is the sum of the risk-free rate of return and certain risk premia.