Interview Question: Who Worries About Risk?

Sample Question #321 (finance)

Briefly explain the concept of risk-neutral valuation. Also, why do you think it’s okay to apply risk-neutral valuation, given that we know few investors are actually risk-neutral. What are some of the most important implications of the risk-neutral assumption.

Bonus question: Can you think of examples of investors who are truly risk-neutral in the real world, even in the absence of perfectly hedged portfolios?

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One Response to Interview Question: Who Worries About Risk?

  1. Solow2012 says:

    Risk neutral valuation is based on neutral probability, under which both stock and interest have the expected same expected return. Investors dose not require compensation or pay for extra to hold them. By no arbitrage option pricing, any derivative could be reproduced by combinations of stock and money markets, and therefore their expected return also has the same value as interests.

    The assumption of risk neutral valuation is no-abitrage market.

    bonus: don’ t know

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