Risk-Neutral Measure

A risk-neutral measure is a mathematical concept used in finance to evaluate the expected value of future asset prices. Under this measure, all investors are assumed to be indifferent to risk, meaning assets are priced based solely on their expected returns without risk premiums. This simplifies the process of valuing derivatives and other financial instruments by transforming complex risk assessments into a framework where probabilities are adjusted so that the expected growth rate equals the risk-free rate. Essentially, it provides a standardized way to model and compare potential outcomes without factoring in investor risk preferences.