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
dollar. The implied probabilities sum to less than one. Stake in proportion to them, i.e. , so every outcome returns ; equalising the returns maximises the worst case, giving a sure profit of .
Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.
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