Equivalent Martingale Measures
Categories: Metrics, Investing, Managed Funds
Smart investing requires smart calculations. One of those smart calculations: the Equivalent Martingale Measures, or the risk-neutral measure.
The Equivalent Martingale Measures calculates the expected payouts of an investment within a probability distribution. Which is nifty, whether you’re a Super Safe Sam kind of investor or a Really Risky Rick kind of investor.
The expected payouts help investors see what payouts they could be getting, while the probability distributions tells them the probability that they’ll actually get those payouts. The probability distribution can be tweaked the more risky (or less risky) the asset is.
Equivalent Martingale Measures is used in asset pricing, since it captures the expected payouts and risk all in one, or the discounted expected value.