Which of the Following Statements Is False

question 25

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 underweigh the bad states and overweigh 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:

Preference Shares

Preference shares are shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued.

Ordinary Shares

Shares that have no specific rights to any distributions of profit by the company. Ordinary shareholders obtain what is left after all other parties’ claims have been met.

Liquidation

The process of converting assets into cash or paying off liabilities in order to close down a business.

Liquidations

The process of winding up a company's financial affairs by selling off assets to pay creditors and distribute any remaining assets to shareholders.