Risk-neutral probabilities 211Note that p’ and q’ satisfy (*),the average rate of growth of the stock under p’ and q’ is exactly the same as the rate of growth of the money market account.
If this would be the case then investors must be neutral about risk - they do not require compensation for assuming it (risk averse), nor are they willing to pay for it (risk loving). This is simply not the caseÄp’ and q’ are not theactual probabilities, which we call p and q, but rather so-called risk-neutral probabilities!
Derivative securities: Options - Binomial asset pricing model
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