Return-to-variance gap in a two-marble sibling game
Question
Alice and Bob each hold one red and one blue marble, and each reveals one of theirs chosen uniformly at random. Two blues pay Alice $1, two reds pay Alice $3, and mismatched colours pay Bob $2; all money comes from a third party, so nobody pays anything. Let and be expected payoff divided by payoff variance for Alice and Bob respectively. Compute .
Short answer
. Alice gets , , with probabilities : mean , variance , so . Bob gets or with probability each: mean , variance , so . Same expected payoff, but Alice bears more risk.
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Open the worked solutionLessons behind this question
- Expectation, Mean, and Variance
- Conditional Expectation and Variance Revisited
- Covariance and Correlation
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