Pricing options in the risk-neutral world implies that
A)Trading of options is without risk.
B)All assets are risk-free in this world.
C)All assets earn the risk-free rate of return.
D)All investors are risk-neutral.

Question

Quizplus · Accepted Answer

In the risk-neutral world, all assets earn the risk-free rate of return. This means that the pricing of options is based on the assumption that the underlying asset will earn the risk-free rate of return, regardless of its actual risk. However, this does not necessarily mean that trading of options is without risk or that all investors are risk-neutral.

Pricing Options in the Risk-Neutral World Implies That