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View Full Version : risk neutral vs. actual rate of return on stock

Jello
May 9th 2011, 08:20 AM
Can someone please explain when it is appropriate to use the risk neutral rate vs. the expected rate when evaluating the stock price at time T. In other words, in what situation should I use know to use one over the other?

Thanks

NoMoreExams
May 9th 2011, 09:32 AM
Can someone please explain when it is appropriate to use the risk neutral rate vs. the expected rate when evaluating the stock price at time T. In other words, in what situation should I use know to use one over the other?

Thanks

Have you read anything discussing risk-neutral pricing vs. not?

Jello
May 9th 2011, 11:27 AM
I have read stuff on option pricing with risk neutral vs real world return. But interms of just stock, I am a little lost on whether or not to use actual rate of return or risk neutral. Like with stock simulation questions where they give you a std normal z value and you can use that to find a stock price at time t. I just did one where they used the risk neutral rate to figure out the lognormal mean of the stock, but I thought I previously did one where they used actual rate of return. I guess I am just looking for a break down of which situations call for risk neutral and which call for the actual rate. Or is there a general rule that I am missing?

NoMoreExams
May 9th 2011, 12:20 PM
I have read stuff on option pricing with risk neutral vs real world return. But interms of just stock, I am a little lost on whether or not to use actual rate of return or risk neutral. Like with stock simulation questions where they give you a std normal z value and you can use that to find a stock price at time t. I just did one where they used the risk neutral rate to figure out the lognormal mean of the stock, but I thought I previously did one where they used actual rate of return. I guess I am just looking for a break down of which situations call for risk neutral and which call for the actual rate. Or is there a general rule that I am missing?

Often these topics are discussed on AO: http://www.actuarialoutpost.com/actuarial_discussion_forum/showthread.php?t=216817