Assume the current value of the underlying asset is $20 and the value of the underlying asset tomorrow can either be $15 or $25.What is the risk-neutral probability of generating a 2% return on the asset?
A)0.54
B)−1.46
C)0.135
D)0.9

Question

Quizplus · Accepted Answer

The risk-neutral probability of generating a 2% return on the asset is 0.54. This is because the expected return on the asset is $20 * 0.54 + $25 * 0.46 = $20.28, which is a 2% return on the current value of the asset.

Assume the Current Value of the Underlying Asset Is $20