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Thread: risk/reward comparison

  1. #1
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    risk/reward comparison

    Ok I feel this is probably really easy but I just can't get it.

    I have 100 units and I'm trying to figure out which way to risk said units to the largest final result.

    I have two ways of risking them that reward me at different scales.

    First is that I'm working off of the premise that I will have a positive result on every event %60 of the time.

    Now the first, and simple, way I can do this is to risk 20 units on a single event for a payoff of 1.9:1 units. Since I expect to win 60% of the time, I win 3 of the 5 risks and receive 38 units back from each risk. So therefore at the expected positive result I will on average finish with 114 units.

    The second, and this is where I'm stuck, is to risk 20 units on two events jointly to receive a payoff of 3.6:1 units. To trigger that payoff I'd have to have both connected events be positive. So basically I'd have 5 separate risks with 2 events in each. The payoff is obviously more but is it worth the added risk?

    I'm trying to determine which course of action would on average result in a higher end amount of units. Extend this out to 10000 units for example still at 20 per risk.

    Sorry if I'm missing a simple answer or if this doesn't make sense. Thanks in advance.
    Last edited by chrisk702; Dec 12th 2011 at 07:06 PM.
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