Risk-Neutral Pricing and Measure Theory

Risk-Neutral Pricing and Measure Theory#

Here's something that should bother you: when we price a European call option, we discount the expected payoff at the risk-free rate and completely ignore what the stock is actually expected to return. A stock with a 15% expected annual return and a stock with a 6% expected annual return produce the same option price, assuming identical volatility. That makes no sense if you think about it from a stan...