Risk-neutral probability

CFA Level I Glossary

Risk-neutral probability is the probability weight used in no-arbitrage pricing so the underlying’s expected return equals the risk-free rate. In a one-step binomial, π = (R − d) / (u − d) where R is the risk-free gross return per step. You discount expected payoffs at the risk-free rate under these weights. It is a pricing device, not a real-world forecast of up-move frequency.

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