Which of the Following Is NOT True in a Risk-Neutral

question 16

Multiple Choice

Which of the following is NOT true in a risk-neutral world?

• A) The expected return on a call option is independent of its strike price
• B) Investors expect higher returns to compensate for higher risk
• C) The expected return on a stock is the risk-free rate
• D) The discount rate used for the expected payoff on an option is the risk-free rate

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Definitions:

Profit-Maximizing Output

The level of production at which a firm achieves the highest possible profit, determined by the point where marginal revenue equals marginal cost.

Minimum Level

The Minimum Level refers to the least amount, extent, or degree that is acceptable or achievable in a specific context.

Marginal Cost

The financial requirement for producing a supplementary unit of a product.

Average Total Cost

The total cost divided by the quantity of output produced, representing the average cost per unit of output.