Let's analyze each statement about the risk-free asset: **A. T-notes are considered risk-free in practice because the government always guarantees the payment when due.** - This statement is **incorrect**. While T-notes are considered to have negligible credit/default risk due to the government backing, they are subject to **interest rate risk** because their maturities are longer than T-bills. "Risk-free" in finance typically refers to instruments with **no default and no reinvestment risk** over the relevant horizon, i.e., usually very short-term government securities like T-bills, not longer-term T-notes. Also, the statement that the government "always" guarantees payment is a bit strong—there is assumed to be almost no risk, but it's not literally "always." **B. In practice, T-bills are considered as "risk-free."** - This statement is **correct** in most financial contexts. T-bills are short-term government securities, and are generally used as the proxy for the risk-free asset in theory and practice. **C. Money market funds that invest mainly in T-bills are usually considered as "risk free."** - This statement is generally **correct** for practical purposes, though technically, money market funds may have a small amount of risk (such as operational risk, or very slightly higher risk if they hold instruments other than T-bills), but in practice, they're often treated as risk-free. **D. A default free guarantee (such as a T-bond) is a necessary, but not sufficient condition to make an investment risk free.** - This statement is **correct**. Absence of default risk is necessary, but interest rate risk, inflation risk, and reinvestment risk can still exist, so default-free does not mean completely risk-free for all investors in all circumstances. --- ## **Summary Table** | Statement | Correct/Incorrect | Explanation | |-----------|------------------|-------------| | A | **Incorrect** | T-notes have interest rate risk; not always considered risk-free. | | B | Correct | T-bills are considered risk-free in practice. | | C | Correct | Money market funds investing mainly in T-bills are usually considered risk-free in practice. | | D | Correct | Default-free is necessary, but not sufficient, for an investment to be risk-free. | --- ## **Final Answer** **The incorrect statement(s) about the risk-free asset is/are:** **A only.**

The incorrect statement about the risk-free asset is: **A. T-notes are considered risk-free in practice because the government always guarantees the payment when due.** **Explanation:** While T-notes are backed by the U.S. government and have very low default risk, they are not typically considered "risk-free" in the strict financial sense because they are exposed to interest rate risk due to their longer maturities. The common proxy for a risk-free asset is the short-term Treasury bill (T-bill), which minimizes interest rate and reinvestment risks over a short horizon. Therefore, statement A is incorrect. **Correct statements:** - B: T-bills are generally considered risk-free in practice. - C: Money market funds mainly investing in T-bills are usually regarded as risk-free. - D: Having a default-free guarantee is necessary but not sufficient for an asset to be considered risk-free, since other risks (interest rate, inflation) can still exist. **Final answer:** **A only.**