Which of the Following Statements Is False

question 20

Multiple Choice

Which of the following statements is false?

• A) In both the Binomial and Black-Scholes Pricing Models, we need to know the risk-neutral probability of each possible future stock price to calculate the option price.
• B) In the real world, investors are risk averse. Thus, the expected return of a typical stock includes a positive risk premium to compensate investors for risk.
• C) Because no assumption on the risk preferences of investors is necessary to calculate the option price using either the Binomial Model or the Black-Scholes formula, the models must work for any set of preferences, including risk-neutral investors.
• D) If all market participants were risk-neutral, then all financial assets (including options) would have the same cost of capital - the risk-free rate of interest.

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Definitions:

Valence

In psychology and motivational theory, the degree of attractiveness or aversiveness an outcome holds for a person, influencing their motivation levels.

Valence

The value or importance an individual places on the expected outcome of a particular behavior or action.

Expectancy

The belief or anticipation regarding the outcome of one's efforts, which can significantly influence motivation and behavior.

Publicly

Pertains to anything done or existing in open view, accessible to all members of the community or targeted audience, often under public scrutiny.