medium · Quantitative Finance

According to Girsanov's Theorem, what is the effect of changing from the physical measure P to the risk-neutral measure Q on the dynamics of an asset?

1. It converts the geometric Brownian motion into an arithmetic Brownian motion.
2. It rescales the volatility to account for the market price of risk.
3. It ensures that the asset price becomes a martingale without discounting.
4. It shifts the drift of the Brownian motion but leaves the volatility unchanged.

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