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.
Add Answer to:
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
When we say that rational investors are risk-averse, it means the investor does not like risk...
When we say that rational investors are risk-averse, it means the investor does not like risk and would consider a higher risk project only if the expected return from that project is sufficient to compensate for the higher risk. True False When investors require higher rates of return for investments that have higher variability of returns, this is evidence of risk aversion. True False
Which of the following statements about risk-neutral pricing is most accurate? Select one: While most investors...
Which of the following statements about risk-neutral pricing is most accurate? Select one: While most investors are risk averse, it doesn’t matter if we assume that investors are risk neutral for the purpose of pricing derivatives. The risk-neutral approach was state of the art until Black-Scholes developed their Nobel-prize-winning formula. Some investors are risk-averse, some are risk-neutral and some are risk-seeking. Market prices represent a consensus of various investors’ opinions. As such, prices reflect an averaging of various investors’ opinions,...
2. (a) Explain the terms risk averse, risk loving and risk neutral with the aid of...
2. (a) Explain the terms risk averse, risk loving and risk neutral with the aid of diagrams. Jane's utility (U) depends upon her income( Y) according to the following table U(Y) 50 7 100 9.5 150 200一一 14 250 300 350 12 16.5 17 19 She has received a prize with an uncertain value. In particular, with probability 0.25 she wins $300 and with probability 0.75 she wins $100. (b) What is the expected payoff from this prize? What is...
True or false and why? 5. If all investors in the market become less risk-averse, the...
True or false and why? 5. If all investors in the market become less risk-averse, the slope of the Security Market alone (SML) will decrease. 6. If an investor purchase a enough stocks (say, S&P500 index), the investor can eliminate all of the market risk embedded in those stocks.
Which of the following statements is (are) TRUE? I) Risk-aversion investors accept investments that are fair...
Which of the following statements is (are) TRUE? I) Risk-aversion investors accept investments that are fair games II) Risk-neutral investors judge investments only by expected returns – risk is not relevant III) Risk-averse and risk loving investors consider both an investment’s risk and return IV) Highly risk-averse investors would still allocate a small portion of their savings to stocks Choose from the options below: a) II only b) I only c) II,III and IV only d) I and II only...
Given the following parameters use risk-neutral valuation to value a call option. Current stock price: $65.00...
Given the following parameters use risk-neutral valuation to value a call option. Current stock price: $65.00 Stock will increase or decrease next year by: 15 pct. Call Option strike price: $60.00 Time to expiration: 1 year Risk free rate: 8 pct. A) Value of call: $9.44 B) Value of call: $13.66 C) Value of call: $10.47
true or false: the following is idiosyncratic risk: the risk that the Fed will increase interest rates, thus decreasing demand for real estate company X's products.
true or false: the following is idiosyncratic risk: the risk that the Fed will increase interest rates, thus decreasing demand for real estate company X's products.
ABC's stock price is 88 and in 3 months it will either increase (probability is 50%)...
ABC's stock price is 88 and in 3 months it will either increase (probability is 50%) by 25% or fall by 25%. Then again over the next 3 months (i.e. from month 3 to month 6) it will again increase (probability is 50%) by 25% or fall by 25%. The risk- free rate for 3 months is constant and equal to 2% (not annualized). a) Find the price of a 6-month European call on ABC stock with exercise price of...
ABC's stock price is 88 and in 3 months it will either increase (probability is 50%)...
ABC's stock price is 88 and in 3 months it will either increase (probability is 50%) by 25% or fall by 25%. Then again over the next 3 months (i.e. from month 3 to month 6) it will again increase (probability is 50%) by 25% or fall by 25%. The risk- free rate for 3 months is constant and equal to 2% (not annualized). a) Find the price of a 6-month European call on ABC stock with exercise price of...
2. (a) Explain the terms risk averse, risk loving and risk neutral with the aid of diagrams. Jane's utility (U) depends upon her income( Y) according to the following table U(Y) 50 7 100 9.5 150 200一一 14 250 300 350 12 16.5 17 19 She has received a prize with an uncertain value. In particular, with probability 0.25 she wins $300 and with probability 0.75 she wins $100. (b) What is the expected payoff from this prize? What is...
ABC's stock price is 88 and in 3 months it will either increase (probability is 50%) by 25% or fall by 25%. Then again over the next 3 months (i.e. from month 3 to month 6) it will again increase (probability is 50%) by 25% or fall by 25%. The risk- free rate for 3 months is constant and equal to 2% (not annualized). a) Find the price of a 6-month European call on ABC stock with exercise price of...
ABC's stock price is 88 and in 3 months it will either increase (probability is 50%) by 25% or fall by 25%. Then again over the next 3 months (i.e. from month 3 to month 6) it will again increase (probability is 50%) by 25% or fall by 25%. The risk- free rate for 3 months is constant and equal to 2% (not annualized). a) Find the price of a 6-month European call on ABC stock with exercise price of...
Most questions answered within 3 hours.
-
The population standard deviation for the height of college
basketball players is 3.4 inches. If we...
asked 57 seconds from now -
6.) Use valence bond theory to describe the number and types of
hybrid bonding orbitals on...
asked 1 minute ago -
2. Define/explain the following traits that are important
adaptations for different types of vertebrate animals:
Jaws...
asked 1 minute ago -
Firm K produced 45,000 radios using 9,000 hours of labor in
2003; total labor costs were...
asked 2 minutes ago -
Use the information in the table to answer the
question.
Year
2015
2016
2017
2018
Nominal...
asked 7 minutes ago -
Kelso Corporation just paid a dividend of D_0 = $1.50 per
share, and that dividend is...
asked 8 minutes ago -
Your ANOVA was statistically significant (Reject the
H0). The groups had a means of:
Group A:...
asked 15 minutes ago -
In cases of negative frequency-dependent selection, _______
phenotype typically has _______ fitness
A
the least common...
asked 17 minutes ago -
Class: Criminal Law
Question: Explain the difference between
aggravating and mitigating factors.
asked 22 minutes ago -
#I want you please to explain why the answer for Q10 is ( C )
?...
asked 22 minutes ago -
An island economy consumes only jellybeans, running shoes,
Pepsi, and Vanilla ice compact discs. The base...
asked 26 minutes ago -
On September 1, Ziegler Corporation had 50,000 shares of $5 par
value common stock, and $1,500,000...
asked 27 minutes ago