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Risk-neutral valuation

Updated: Aug 20, 2021

A method for valuing financial assets. Risk-neutral future pay-offs at the risk-free rate of return. The expected value is not obtained using the actual probabilities of each pay-off. Instead, risk-neutral valuation calculates the expected value of future pay-offs using constructed probabilities (‘risk-neutral probabilities’) that have the property of rationalizing observed asset prices assuming all investors were risk-neutral.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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James Knight
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James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the… read more.