Discuss the two major factors that determine the market nominal risk-free rate (NRFR). Explain which of these factors would be more volatile over the business cycle. Step-by-step solution G100% (3 ratings) for this solution Step 1 of 3 Risk-free rate is the rate of return with no risk. Nominal rate of return is return that is adjusted for rate of inflation and real rate of return.

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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.