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 is because pricing options requires a risk-free rate of return as a benchmark, and the prices of the options are determined based on this rate. This does not mean that all assets are risk-free, and it does not imply that trading of options is without risk. It also does not imply that all investors are risk-neutral, as investors may have different levels of risk aversion.

Pricing Options in the Risk-Neutral World Implies That