Question: Explain why risk - neutral probabilities can be used to price derivative securities in a world where investors are risk averse. Question content area bottom

Explain why risk-neutral probabilities can be used to price derivative securities in a world where investors are risk averse.
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Part 1
Risk-neutral probabilities can be used to price derivative securities because:(Select the best choice below.)
A.
The pricing of derivatives only depends on the prevailing risk-free rate.
B.
The pricing of derivatives only depends on the relationship between the actual probabilities and the risk-neutral probabilities.
C.
The pricing of derivatives only depends on the level of risk that investors are willing to take.
D.
The pricing of derivatives only depends on the characteristics of the underlying asset.

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