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Is the risk neutral or hedging probability in a real option valuation higher or lower for...

Is the risk neutral or hedging probability in a real option valuation higher or lower for a risk-averse investor compared to a risk-neutral investor?

Cannot tell

Higher

Lower

The same

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Answer #1

The correct option is Higher.

In case of a risk-averse investor (one who gives more importance to preserve capital than to gains), he will use risk neutral or hedging to offet his risk to preserve his capital or to minimize any potential future loss. he will limit his gain to any arbitrage possibility only. But a Risk neutral investor (who focus on making more profits and understands that to make profits he has to take some risk), he will not use hedging to offset his risk and limit his future profits.

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