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Locking in profit on a three-horse race

Question

A race has three horses. A $1 stake on horse 1 returns $2 if it wins, a $1 stake on horse 2 returns $4 if it wins, and a $1 stake on horse 3 returns $6 if it wins; losing stakes return nothing, and the stake is not refunded on top of these amounts. You have exactly $1 and may split it across horses in any fractions.

What is the largest profit you can guarantee whatever the outcome?

Short answer

111\tfrac{1}{11} dollar. The implied probabilities 12+14+16=1112\tfrac12+\tfrac14+\tfrac16 = \tfrac{11}{12} sum to less than one. Stake in proportion to them, i.e. 611,311,211\tfrac{6}{11}, \tfrac{3}{11}, \tfrac{2}{11}, so every outcome returns 1211\tfrac{12}{11}; equalising the returns maximises the worst case, giving a sure profit of 111\tfrac{1}{11}.

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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