trader interview questions shared by candidates
If you could play a game just once with two choices: take $1 or have a 1/10 chance of getting $10, what would you choose? How about $1 vs 1/10 chance of $15? How about $10000 vs 1/10 chance of $100k?
i disagree with D:, it's more about risk-aversion. Basically, when the averages are the same one has to go for smaller \sigma. Indeed 1 and 3 are answered correctly be D:. 2 depends on your personal risk-aversion preferences, because the game is played only ONCE. I would still go for 1 dollar based on my personal preferences. Of course, if one repeats the game many times, then just go for better averages as D:. However, there is a psychological way to explain a choice of 100k$ with prob 1/10. Suppose you really really want to buy a ferrari right now to impress a future girlfriend. 10k$ wouldn't make a difference, but 100$k would do a job and change you life. So you don't care if you have 10k$ more or less but you care about 100k$ . This is one of the reasons why we had so much trouble in finance in the last years.
It's about the expected value of probability outcomes. There are two ways of answering this: if you do this operation once, you'd better take the cash being offered; if you're repeating the operation over and over, you'd better go with the probability option. 1. $1 = 1/10 * $10 --> indifferent, go with the cash 2. $1 go with the chance 3. $10,000 = 1/10 * $100,000 --> indifferent, go with the cash
think about what a day trader/scalper does all day in order to stay consistently profitable?