Markets: A Rigorous Course

M03 · Problem 4 ★★★ Check

Where does overbetting turn negative?

(a) For b=1b = 1, compute the zero f0f_0 of gg numerically for p=0.55,0.6,0.7p = 0.55, 0.6, 0.7 and compare with 2f∗2f^*. (b) For a general bet XX with m=EXm = E X, v=EX2v = E X^2, m3=EX3m_3 = E X^3, show that g(f)=fm−12f2v+13f3m3+O(f4)g(f) = fm - \frac12 f^2v + \frac13 f^3m_3 + O(f^4), and use it to explain why the zero of gg lies near 2m/v2m/v for small edges and moves right when m3m_3 is large. (c) Verify (b) on the long-shot bet p=0.02p = 0.02, b=100b = 100: compute m,v,m3m, v, m_3, the cubic term at f=2m/vf = 2m/v, the exact g(2f∗)g(2f^*) and the exact zero f0f_0.

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Commas, ₹, % and 1e-3 notation are accepted.

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