Risk Neutral

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.



comments powered by Disqus
Hot Definitions
  1. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  2. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  3. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  4. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  5. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  6. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
Trading Center