Home » Eng Finance » R » Risk-neutral

Risk-neutral

An individual is risk-neutral if they are indifferent between a risky prospect with an expected pay-off of M and a certain pay-off of M. This will be true whenever the marginal utility of wealth is constant, so the utility function is linear. A risk-neutral individual will be indifferent between entering and not entering an actuarially fair gamble.

Reference: Oxford Press Dictonary of Economics, 5th edt.