Good afternoon everyone!
I have a question regarding the risk free rate of my two asset portfolio. For my course, we have to create a two asset portfolio with the time frame of 2015-2020 with monthly returns. For the risk free rate, I have utilised the 5-year Treasury rate because it has the same maturity as the project . However, I am unsure about my approach for the monthly risk-free rate, which I need since all of my returns of my assets are also monthly.
As of now, I took the adjusted monthly return of the 5-year Treasury rates from 2015-2020 and calculated the average yield of a 5-year Treasury rate . Since the yield of the US Treasuries are denoted in yearly terms, I took the caculated average yield of those five years and plotted the number in the following formula:
monthly rf yield = LN(1+avg. annual rf yield)/12
This gave me the avg. monthly rf rate. Is this approach appropiate or should I approach this problem in a different way? Kind regards