Questions / Quant trading, Expected value & odds
Pay for perfect information
A project costs 7 to enter and pays 12 or 0 with equal probability. You can decline for zero. If you could see the payoff before choosing, what is the maximum fair price of this information?
Answer it in the app It's free. You get hints, a second try if you miss, and a follow-up question.
Show the answer and worked solution
Answer: 2.5 points (5/2)
- Without information, decline because 6 − 7 is negative. With information, enter only in the high state: 0.5 × 5 = 2.5.
Interview shortcut. Information is worth the bad decisions it prevents: here it lets you enter only in the 12 state, worth 5 half the time.
In the app this has a follow-up where one thing about the setup changes. Try the follow-up.