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What is is missing is the nature of the "subject", ie what is the likeliness of
this loss occurring. To find out the expected return one has to compute
following:
Return if you win * chance of winning - return if you lose * (1 - chance of
winning)
If the chance were 50%:
A: 10% * 100% - 0% * 0% = 10%
B: 50% * 50% - 50% * 50% = 0% Given enough time you will even ruin yourself
C is the same as B only it gets you to ruin on the first loss, which well be
the first trade.
Most people pick B because of the illusion of a possible high return and the
idea they can do better than 50% chance, which in real life is actually more
45% winning, 65% losing because of second guessing one's own inputs.
Gwenn
| -----Ursprungliche Nachricht-----
| Von: David Michael Newman [SMTP:dmn1@xxxxxxxxxxx]
| Gesendet am: Monday, August 23, 1999 12:37 AM
| An: realtraders@xxxxxxxxxxxx
| Betreff: Re: Money Management question
|
| Last week someone asked about optimal asset allocation among three
| assets:
| 10% return guaranteed
| 50% return subject to 50% loss
| 100% return subject to 100% loss
|
| Well an economist named Markowitz won a Nobel prize for answering just
| that question. He calls it Mean-Variance Analysis. There isn't enough
| information to answer the question you asked. You also need to know the
| correlation between the risky assets (the 50% and the 100%)
|