What is a risk-free asset? Similarly, what is the risk-free rate? It could be US Treasury bills for US investors or for foreign investors who believe that the dollar is a currency of safety. It could be a local short-term rate foreign rate. However, depending on how you frame the question, there can be many risk-free assets or there can be no risk-asset and this is a problem. This issue is not new, but it should be discussed since we are again seeing lower rates around the world.
Short-term sovereign rates in many countries are negative and there are over $11 trillion in bonds with negative rates. It is hard to say that these are safe assets. If the defining characteristic is protection of principal over time, the current rate environment in many countries says that you should settle for a loss.
Real rates also are negative for many assets, so investors should settle for an erosion of purchasing power over time. The only way that investor should be willing to hold these assets if they believe that any risky combinations of assets will produce even lower returns. The oddity of negative rates is that it is not a choice of keeping your money versus a chance of gain or loss, but a certainty of losing money versus a chance of losing or gaining some different pay-off. An investor will lose. It is just a matter of how much.
The investment world is a set of risk choices and not safe choices. If your idea of safety is to ensure a certain cash flow for retirement, create a specific nest egg, or generate returns that will meet specific yields or cash flows needs, risk-free assets could be very risky. If you need to meet specific liabilities the risk-free rate could ensure failure. There may not be any risk-free assets.
The fact that there are no safe assets does not change the fact that investors still have to make relative choices. Some are risky than others. Each have a different set of risks. Difficult choices will have to be made.