Risk free rate of return

In finance, the risk-free rate of return, usually shortened to the risk-free rate, is the return offered by an investment that is considered guaranteed and without risk of monetary loss.

For any given currency, the risk-free rate is defined by the yield of sovereign bonds - because the government can always pay the debt, the only risk to the investor are "acts of God" beyond human control, such as national or international crises, disasters and the apocalypse.

All other investments carry more risk, therefore they can only attract investors by promising a higher rate of return. The risk-free rate of return is important in investing and finance because it is the benchmark for the returns of all other investments. 

Because the sovereign bond issuer must  sell them on the open market and investors decide how much they are prepared to pay for the bond, the yield of sovereign bonds has a relationship with the currency's expected rate of inflation. Hence the risk-free rate of return always has a relationship with inflation.