An CFA candidate enters a bet with a friend regarding the stability of the schweser website. For every day that the site does not crash over the course of 1 week, his friend will pay him $1000 dollars. However, if the site crashes on any of the days, his friend gets $25 dollars. Based on historical data, the probability of the site crashing on any given day is 75% with an 80% chance on Tuesday and Wednesday. What is the expected value of the bet after the full week? Who has the better side of the bet?
No crash: (1-0.75)^5 * (1-0.8)^2 *1000 = $0.039 Crash: 0.75*25*5 + 0.8*25*2 = $133.75 seems weird…
mcf Wrote: ------------------------------------------------------- > An CFA candidate enters a bet with a friend > regarding the stability of the schweser website. > For every day that the site does not crash over > the course of 1 week, his friend will pay him > $1000 dollars. However, if the site crashes on > any of the days, his friend gets $25 dollars. > Based on historical data, the probability of the > site crashing on any given day is 75% with an 80% > chance on Tuesday and Wednesday. > > What is the expected value of the bet after the > full week? Who has the better side of the bet? total probability rule???
$133.75 EV if you are betting for $0.039 if you are betting against
Correct calcs to my non-logical pricing framework.