The risk-neutral probability (π) is a key concept in binomial option pricing, calculated as:

$π = \frac{(1 + r) - R_d}{R_u - R_d}$

where:

• $r$ is the risk-free rate (5% or 0.05),
• $R_u$ is the expected up move factor (1 + 0.25 = 1.25),
• $R_d$ is the expected down move factor (1 - 0.25 = 0.75).

Substituting the values:

$π = \frac{(1 + 0.05) - 0.75}{1.25 - 0.75} = 0.60$

This represents the risk-neutral probability of an increase in the underlying price. The probability of a decrease is therefore:

$1 - π = 1 - 0.60 = 0.40$

Thus, the correct answer is B (0.40).