Which of the Following Statements Is FALSE

question 13

Multiple Choice

Which of the following statements is FALSE?

• A)After we have constructed the tree and calculated the probabilities in the risk-neutral world,we can use them to price the derivative by simply discounting its expected payoff (using the risk neutral probabilities)at the risk-free rate.
• B)By using the probabilities in the risk-neutral world we can price any derivative security - that is,any security whose payoff depends solely on the prices of other marketed assets.
• C)To ensure that all assets in the risk-neutral world have an expected return equal to the risk-free rate,relative to the true probabilities,the risk-neutral probabilities underweight the bad states and overweight the good states.
• D)In Monte Carlo simulation,the expected payoff of the derivative security is estimated by calculating its average payoff after simulating many random paths for the underlying stock price.

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Definitions:

Price Elasticity Of Demand

A measure of how much the quantity demanded of a good responds to a change in its price, indicating its sensitivity.

Marginal Cost

The additional cost incurred from producing one more unit of a good or service.

Profit-Maximizing Seller

An economic agent whose primary objective is to achieve the highest possible profit from their sales.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision, used to evaluate the trade-offs in resource allocation.