- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 45. Analysis of Active Portfolio Management
- Subject 3. The Fundamental Law of Active Management
CFA Practice Question
Consider the game of roulette in a casino. If the wheel spins 100 times and at each spin the player's bet is EUR 1, the expected return is the same as when the wheel spins only once and the bet is EUR 100. Which option is preferable for the house?
B. the second option
C. Both are equivalently preferable as the expected value is the same for the house.
A. the first option
B. the second option
C. Both are equivalently preferable as the expected value is the same for the house.
Correct Answer: A
The first option is far more preferable for the house, because the level of breadth is higher and it offers a better reward-risk ratio.
User Contributed Comments 3
| User | Comment |
|---|---|
| nieuwed | Could somebody please elaborate on this? Why is it better for the house and not the player? |
| jimmyvo | With one spin, the player may get lucky. Think of law of large numbers. As the number of sample increases, the more the ratio converges with its expected probability. |
| CFAJ | yeah if you are only taking into account that one player playing only those 10 or 1 times, but this is a casino so they are going to have multiple people playing multiple games so the law of large numbers applies for both options. don't bother saying it is a casino if you are going to test peoples knowledge of the law of large numbers |