Which of the following is NOT true in a risk-neutral world?
A) The expected return on a call option is independent of its strike price
B) Investors expect higher returns to compensate for higher risk
C) The expected return on a stock is the risk-free rate
D) The discount rate used for the expected payoff on an option is the risk-free rate

Question

Quizplus · Accepted Answer

In a risk-neutral world investors require an expected return equal to the risk-free rate and the discount rate that should be used for all expected payoffs is the risk-free rate.

Which of the Following Is NOT True in a Risk-Neutral