The risk-neutral measure arises when we select ________ as the numeraire.

Question

Quizplus · Accepted Answer

The risk-neutral measure requires selecting a numeraire that is free from risk, and a money market account is the best choice as it is considered risk-free. Therefore, we can use the money market account as a benchmark to measure the performance of other assets under the risk-neutral measure. Choosing any other asset not considered risk-free, such as asset portfolios, corporate bonds, or treasury bonds, would not result in a risk-neutral measure.

The Risk-Neutral Measure Arises When We Select ________ as the Numeraire