Concept: Risk-Neutral Probability (π)

CFA Level I Glossary

Risk-neutral probability is a pricing device derived from replication. Under that measure, the expected return of the underlying equals the risk-free rate, so you can discount expected payoffs at the risk-free rate. It is not a forecast of the real-world chance of an up or down move. Candidates often treat π as a true probability estimate rather than a no-arbitrage pricing tool.

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