Risk Neutral

AAA

DEFINITION of 'Risk Neutral'

Indifference to risk. The risk-neutral investor would be in the middle of the continuum represented by risk-seeking investors at one end, and risk-averse investors at the other extreme. Risk-neutral measures find extensive application in the pricing of derivatives.

INVESTOPEDIA EXPLAINS 'Risk Neutral'

A risk-neutral investor is more concerned about the expected return on his or her investment, not on the risk he or she may be taking on. A classic experiment to distinguish between risk-taking appetites involves an investor faced with a choice between receiving, say, either $100 with 100% certainty, or a 50% chance of getting $200.


The risk-neutral investor in this case would have no preference either way, since the expected value of $100 is the same for both outcomes. In contrast, the risk-averse investor would generally settle for the "sure thing" or 100% certain $100, while the risk-seeking investor will opt for the 50% chance of getting $200.

RELATED TERMS
  1. Equivalent Martingale Measures

    In asset pricing, a probability distribution of expected payouts ...
  2. Risk-Neutral Measures

    A theoretical measure of probability derived from the assumption ...
  3. Risk Seeking

    The search for greater volatility and uncertainty in investments ...
  4. Conversion Arbitrage

    An options trading strategy employed to exploit the inefficiencies ...
  5. Risk Tolerance

    The degree of variability in investment returns that an individual ...
  6. Structured Investment Products ...

    A type of investment specifically designed to meet an investor's ...
Related Articles
  1. Investing Basics

    Calculating Risk and Reward

    Investing money into the investment markets has a high degree of risk, and if you're going to take the risk, the amount of money you stand to gain needs to be big.
  2. Investing Basics

    Determining Risk And The Risk Pyramid

    Many investors do not understand how to determine the risk level their individual portfolios should bear.
  3. Investing

    Measure Your Portfolio's Performance

    Learn three ratios that will help you evaluate your investment returns.
  4. Bonds & Fixed Income

    Find The Highest Returns With The Sharpe Ratio

    Learn how to follow the efficient frontier to increase your chances of successful investing.
  5. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  6. Options & Futures

    A Beginner's Guide To Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
  7. Options & Futures

    5 "New" Rules For Safe Investing

    Did the credit crisis leave a new landscape for investors? Maybe, but it's not as unfamiliar as you may have imagined.
  8. Stock Analysis

    Is Prospect Capital Exposed To Elevated Losses?

    According to a federal government report, the quality of leveraged loans has begun to deteriorate. Prospect Capital specializes in these types of loans.
  9. Investing

    Are Women Steadier Long-Term Investors?

    We look at the differences in behavior between male and female and found that women are steadier customers when it comes to following allocation advice.
  10. Options & Futures

    Avoid Future Shock By Protecting Your Portfolio With Futures

    Worried about protecting your portfolio of diversified stocks and assets? Using futures with correct strategies can help.

You May Also Like

Hot Definitions
  1. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  2. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  5. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  6. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
Trading Center