Risk Neutral

See: Hedge Ratio. See: Portfolio Insurance.

Any investment (or any bet in a Vegas casino, for that matter) comes with two components: risk and reward. Reward represents the amount you can make. Risk represents a combination of the chances that you might lose...and the amount you could possibly lose in the process.

A risk-neutral investor ignores all that nasty risk stuff. They only focus on the reward. They might drop their entire wad on Red 23, because, at 36-to-1, it’s got one of the best payouts in the casino. Never mind that it only has a 1-in-38 chance of hitting. That kind of thinking is for losers. So says the risk-neutral better.

The concept of risk neutral is more of an academic contrivance than a Thing that exists in pure form in the wild. Most investors have some aversion to risk, otherwise they wouldn’t last long. But the concept has uses in fields of study like game theory.