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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