Optimal threshold in a song-stopping bet
Question
A song lasts seconds. You name a number with ; then the song is halted at a time chosen uniformly over its length. If it halts no later than seconds in, you lose units; if it halts after that, you win units. Which gives you the greatest expected profit?
Short answer
. You lose with probability and win with probability , so your expected profit is , a downward parabola. Its vertex is where , i.e. , giving profit .
Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.
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Open the worked solutionLessons behind this question
- Duration and Convexity: Measuring and Managing Interest Rate Sensitivity
- Expectation, Mean, and Variance
- Conditional Expectation and Variance Revisited
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