In economics, the term risk neutral is used to describe an individual who values risk at a constant value. Risk neutral is in between risk aversion and risk seeking, and a risk neutral individual will accept exactly the same interest rate (usually the the risk free rate) for all assets. Face-to-face trading interactions on the New York Stock Exchange trading floor. ... For the Parker Brothers board game, see Risk (game) For other uses, see Risk (disambiguation). ... Risk aversion is a concept in economics and finance theory explaining the behaviour of consumers and investors under uncertainty. ... This article is about the concept of risk. ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no risk. ...

The value that a risk-neutral individual assigns to a financial instrument is usually different from the expected value of the financial instrument based on market prices. Because real market prices will be affected by the price the market is willing to pay for risk, actual market prices will vary from risk neutral prices and risk neutral probabilities will vary from actual probabilites. Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. ... In probability theory the expected value (or mathematical expectation) of a random variable is the sum of the probability of each possible outcome of the experiment multiplied by its payoff (value). Thus, it represents the average amount one expects as the outcome of the random trial when identical odds are...

Because of this, the term risk-neutral probabilities (or risk-neutral probability distribution) is used to refer to probabilities (or a distribution) which when used as weights in an expected-value calculation will reproduce the market value of financial instruments. In general, risk-neutral probabilities differ from real-world probabilities because the market does not assign value in the same way that a risk-neutral individual would. In mathematical finance, a risk-neutral measure is a probability measure in which todays fair (i. ... Market capitalization, often abbreviated to market cap, mkt. ...

A far more mathematically advanced definition is "A risk neutral world is one where investors are assumed to require no extra return on average for bearing risks"

E.g : Assume two companies, one of which might go bankrupt anytime and the other which has been growing at 80% per annum. A risk neutral individual would lend money at the same rate to both of them. He doesn't account for the premium that is charged by a risk averse person. The rate of interest would be risk free rate. There is no element of risk premium embedded in risk risk free rate.

A simpler, but more intuitive example: Suppose someone owes you 100 EUR. She offers you a game: You throw a dice, and if the outcome is odd, she'll pay you 200 EUR, otherwise you get nothing. A risk neutral person would see no difference between both options - both pay an expected 100 EUR.