Risk neutral

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In economics, the term risk neutral is used to describe an individual who cares only about the expected return of an investment, and not the risk (variance of outcomes or the potential gains or losses). A risk-neutral person will neither pay to avoid risk nor actively take risks.

Risk neutral is in between risk aversion and risk seeking.

The value that a risk-neutral individual assigns to a financial instrument is equal to the value of the instrument in each scenario, weighted by the probability of each scenario (in other words, it is equal to the expected value). 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.

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