Risk Neutral

Dictionary Says

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 Says

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. Closed-End Fund

    A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
  2. Payday Loan

    A type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash.
  3. Securitization

    The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors.
  4. Economic Forecasting

    The process of attempting to predict the future condition of the economy. This involves the use of statistical models utilizing variables sometimes called indicators.
  5. Chicago Mercantile Exchange - CME

    The world's second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and agricultural products.
  6. Private Equity

    Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
Trading Center