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Risk-neutral valuation

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Reference no: EM133062331

Please mark whether each of the following statements is true or false.

(a) Consider a stock whose required return is higher than the risk-free return. Then, in a binomial tree, the real probability of an increase in the price is higher than the risk-neutral probability of the increase.

(b) In the risk-neutral valuation, we assume that investors are risk-neutral. Thus, the option price from the risk-neutral valuation should be different from the price from the DCF approach where we acknowledge investors' risk-aversion.

(c) In the risk-neutral valuation, we penalize risk by changing the probability.

Reference no: EM133062331

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