medium · Quantitative Finance stochastic
Under Girsanov's theorem, if a stock follows dS_t = μ S_t dt + σ S_t dW_t under the real-world measure mathbbP, what transformation occurs to the drift under the risk-neutral measure mathbbQ?
- The drift μ is increased by the volatility σ.
- The drift remains μ but the volatility σ is adjusted.
- The drift μ is replaced by the risk-free rate r.
- The drift is replaced by μ - r.
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