Which of the Following Statements About Robert Merton's "Trick" Is

question 12

Multiple Choice

Which of the following statements about Robert Merton's "Trick" is INCORRECT?

• A) Merton used to give the intuition of risk-neutral valuation to MIT students with an argument that he called The Trick.
• B) The Trick involves considering two worlds: the real world (where investors could be risk-averse)and a pseudo-world (where investors would be risk-neutral).
• C) The same securities: a bond (which may be viewed as a money market account),a stock,and an option trade in both worlds.
• D) The probabilities of the stock going up and down are the same in both the real world and the pseudo-world.
• E) One can easily move from the real world to the pseudo-world where things are tractable,price the option there by risk-neutral valuation,and bring that price back to the real world.

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Definitions:

Plantar Flexion

The movement of the foot that increases the angle between the sole of the foot and the back of the leg, like pointing the toes.

Dorsiflexion

The movement that elevates the foot upwards towards the shin, decreasing the angle between the dorsum of the foot and the leg.

Circumduction

A circular movement of a limb or eye where the end follows a circular path.

Lateral Flexion

The movement of bending sideways at the waist or neck, reducing the angle between the side of the body or head and the arms or legs.