The risk-neutral approach is an application of the certainty equivalent method.

Question

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The risk-neutral approach is a method for valuing risky assets by assuming that investors are indifferent to risk and that the expected return on a risky asset is equal to the risk-free rate. This is similar to the certainty equivalent method, which also converts uncertain cash flows into an equivalent certain amount. Therefore, the risk-neutral approach can be considered an application of the certainty equivalent method.

The Risk-Neutral Approach Is an Application of the Certainty Equivalent