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Risk-free Rate (Canada and US)

This section explains how we compute a risk-free rate when our asset returns are daily close-to-close trading-day returns.

1. Proxy selection

We employ short-term government rates in the same currency as the return series:

  • Canadian 1-month government rate
  • 3-month government rate (commonly referred to as the 3-month U.S. Treasury bill (T-bill))

These rates are used as practical “cash-like” proxies for risk-free in portfolio analytics.

2. Converting vendor yield quotes into a daily risk-free rate

Vendor data commonly arrives as an annualized yield in percent (example: 2.43 meaning 2.43% per year). Let \(y_t\) be the vendor yield quote at time \(t\), so \(r_{annual,t} = y_t / 100\).

We convert this annualized yield into a per-trading-day risk-free return using a 252 trading-day convention, applied identically to both the Canadian and U.S. proxies:

\[r_{f,t} = (1 + r_{annual,t})^{1/252} - 1.\]

Because the vendor does not publish yields on weekends and holidays, the last available yield is forward-filled onto the trading-day grid so that every return observation has a risk-free rate.

Which proxy is used follows the asset's listing currency: Canadian-listed tickers use the CA 1-month government rate, and all others use the US 3-month T-bill rate.