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No. Actually "risk neutral pricing" does not make assumptions on the risk preferences of the agents. Securities are priced as if agents were risk neutral (that is to say as a straight expectation of discounted payoffs) but where probabilities of states of the world are not the true ones but they have been adjusted to reflect preferences. The math: Say ...


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I agree with Alex C. Profit is too slippery a measure to work with. Focusing on profit raises a number of questions. Can the reported profit be trusted? Profit as a measure is much more open to manipulation than stock price. What year’s profits should be maximised? You can see straightaway that a good business decision may result in lower profits for the ...


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In a world of uncertainty no one knows what future profits will be (especially > 1 year from now). All we can do is estimate. Who should we ask? The company management has an incentive to give out estimates that may be too optimistic. If you ask the competitors they are probably too pessimistic. Fortunately we have a machine called the stock market which ...



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