DEFINITION of 'RiskNeutral Measures'
A theoretical measure of probability derived from the assumption that the current value of financial assets is equal to their expected payoffs in the future discounted at the riskfree rate. Another assumption made is that there is an absence of arbitrage. The term derives its name from the fact that all financial assets have the same expected rate of return  i.e., the riskfree rate.
Also known as equivalent martingale measure or Qmeasure.
Next Up
BREAKING DOWN 'RiskNeutral Measures'
The concept of a riskneutral measure is used to price derivatives. The riskfree rate of return is the return on an investment where the theoretical risk is zero. In practice, the interest rate on threemonth U.S. Treasury bills is commonly used as a proxy for the riskfree rate.
RELATED TERMS

Risk Premium
The return in excess of the riskfree rate of return that an ... 
Conversion Arbitrage
An options trading strategy employed to exploit the inefficiencies ... 
Equivalent Martingale Measures
In asset pricing, a probability distribution of expected payouts ... 
Capital Market Line  CML
A line used in the capital asset pricing model to illustrate ... 
Derivative
A security with a price that is dependent upon or derived from ... 
Underlying Asset
A term used in derivatives trading, such as with options. A derivative ...
Related Articles

Investing
RiskFree Rate of Return
The riskfree rate of return is the theoretical rate of return of an investment with zero risk. The riskfree rate represents the interest an investor would expect from an absolutely riskfree ... 
Options & Futures
How Risk Free Is The RiskFree Rate Of Return?
This rate is rarely questioned  unless the economy falls into disarray. 
Stock Analysis
Find The Right Discount Rate Amid Post2007 Risks
OIS discounting has become part of standard valuation techniques, in a market in which there is more uncertainty and less proxies for the riskfree rate. 
Options & Futures
How & Why Interest Rates Affect Futures
There are at least four factors that affect change in futures prices, including risk freeinterest rates, particularly in a noarbitrage environment. 
Bonds & Fixed Income
How Safe Are U.S. Bonds?
U.S. Treasury securities are often described as riskfree investments, but that is just not true. 
Personal Finance
RiskFree & 20% Return? More Like 100% Scam
An investment that promises a riskfree return of 20% is 100% likely to be a scam. 
Investing Basics
How to Calculate Risk Premium
Think of a risk premium as a form of hazard pay for risky investments. 
Investing
The Capital Asset Pricing (CAPM) Model: Pros and Cons
CAPM, while criticized for its unrealistic assumptions, provides a more useful outcome than either the DDM or WACC in many situations. 
Options & Futures
Trading The Odds With Arbitrage
Profiting from arbitrage is not only for market makers  retail traders can find opportunity in risk arbitrage. 
Economics
Interest Rate Arbitrage Strategy: How It Works
Changes in interest rates can give rise to arbitrage opportunities that, while shortlived, can be very lucrative for traders who capitalize on them.
RELATED FAQS

What is the correlation between equity risk premium and risk?
Learn about the relationship between the riskfree rate of return and the equity risk premium, and understand how the riskfree ... Read Answer >> 
How accurate is the equity risk premium in evaluating a stock?
Learn about the drawbacks of using the equity risk premium to evaluate a stock, and understand how it is calculated using ... Read Answer >> 
What nations other than the U.S. have riskfree interest rates?
Find out which countries have riskfree rates of returns. This is typically the yield on a 3month note, and it can be negative ... Read Answer >> 
How is bond yield affected by monetary policy?
Learn about how bond yields are affected by monetary policy. Monetary policy determines the riskfree rate of return, which ... Read Answer >> 
How do I calculate the equity risk premium in Excel?
Find out how to calculate the equity risk premium for an individual security using Microsoft Excel, including how to estimate ... Read Answer >> 
How is the expected market return determined when calculating market risk premium?
Find out how the expected market return rate is determined when calculating market risk premium and how these figures are ... Read Answer >>