# Risk-Neutral Probabilities

- Risk-Neutral Probabilities
- Probabilities of future outcomes adjusted for risk, which are then used to compute expected asset values. The benefit of this risk-neutral pricing approach is that the once the risk-neutral probabilities are calculated, they can be used to price every asset based on its expected payoff. These theoretical risk-neutral probabilities differ from actual real world probabilities; if the latter were used, expected values of each security would need to be adjusted for its individual risk profile.
A key assumption in computing risk-neutral probabilities is the absence of arbitrage. The concept of risk-neutral probabilities is widely used in pricing derivatives.

*Investment dictionary.
Academic.
2012.*

### Look at other dictionaries:

**Risk-neutral measure** — In mathematical finance, a risk neutral measure, is a prototypical case of an equivalent martingale measure. It is heavily used in the pricing of financial derivatives due to the fundamental theorem of asset pricing, which implies that in a… … Wikipedia

**Risk neutral** — In economics, risk neutral behavior is in between risk aversion and risk seeking. If offered either 50 EUR or a 50% chance of 100 EUR, a risk averse person will take the 50 EUR, a risk seeking person will take the 50% chance of 100 EUR, and a… … Wikipedia

**Risk** — takers redirects here. For the Canadian television program, see Risk Takers. For other uses, see Risk (disambiguation). Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable… … Wikipedia

**Risk (game)** — Infobox Game subject name = image link = image caption = A typical game of Risk in play. players = 2–6 ages = 10+ setup time = 5–20 minutes playing time = 1–8 hours (player dependent) complexity = medium strategy = high random chance = Medium… … Wikipedia

**Negative probability** — In 1942, Paul Dirac wrote a paper The Physical Interpretation of Quantum Mechanics [1] where he introduced the concept of negative energies and negative probabilities: Negative energies and probabilities should not be considered as nonsense. They … Wikipedia

**Radon–Nikodym theorem** — In mathematics, the Radon–Nikodym theorem is a result in functional analysis that states that, given a measurable space ( X , Sigma;), if a sigma finite measure nu; on ( X , Sigma;) is absolutely continuous with respect to a sigma finite measure… … Wikipedia

**Expected utility hypothesis** — In economics, game theory, and decision theory the expected utility hypothesis is a theory of utility in which betting preferences of people with regard to uncertain outcomes (gambles) are represented by a function of the payouts (whether in… … Wikipedia

**Black–Scholes** — The Black–Scholes model (pronounced /ˌblæk ˈʃoʊlz/[1]) is a mathematical model of a financial market containing certain derivative investment instruments. From the model, one can deduce the Black–Scholes formula, which gives the price of European … Wikipedia

**Uncertainty** — For the film of the same name, see Uncertainty (film). Certainty series Agnosticism Belief Certainty Doubt Determinism Epistemology … Wikipedia

**Rational pricing** — is the assumption in financial economics that asset prices (and hence asset pricing models) will reflect the arbitrage free price of the asset as any deviation from this price will be arbitraged away . This assumption is useful in pricing fixed… … Wikipedia