Question: 1.In words, a)explain how one values a derivative with risk neutral valuation. b) Referring to CAPM, (Ri=Rf+B(Rm-Rf) explain why the S&P 500 would be discounted

1.In words,

a)explain how one values a derivative with risk neutral valuation.

b) Referring to CAPM, (Ri=Rf+B(Rm-Rf) explain why the S&P 500 would be discounted at the risk free rate (not Rm) under risk neutral valuation.

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