In risk-neutral valuation, we recognize that investors are risk-averse and thus modify the probability of an...
In risk-neutral valuation, we recognize that investors are risk-averse and thus modify the probability of an increase in a stock price from the real probability.
(a) True
(b) False
Homework Answers
Risk Neutral valuation , by its definition, assumes a world where investors are neutral to risk and thus the risk free rate is used to discount the future cash flows. So, we do not necessarily have to know whether the investors are risk averse or risk seeking and their required rates of return
Hence, the statement is false.
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In risk-neutral valuation, we recognize that investors are
risk-averse and thus modify the probability of an...
Suppose that risk-averse investors expect the return on a stock to be µ per annum and...
Suppose that risk-averse investors expect the return on a stock to be µ per annum and the risk-free rate is r per annum. In a binomial tree, if µ < r, the real probability of an increase in the stock price is lower than the risk-neutral probability of the increase. (a) True (b) False
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