Question

The game of European roulette involves spinning a wheel with 37 slots: 18 red, 18 black, and 1 green. A ball is spun onto the wheel and will eventually land in a slot, where each slot has an equal chance of capturing the ball. Gamblers can place bets on red or black. If the ball lands on their color, they double their money. If it lands on another color, they lose their money.(a) Suppose you play roulette and bet $3 on a single round. What is the expected value and standard deviation of your total winnings?(b) Suppose you bet $1 in three dierent rounds. What is the expected value and standard deviation of your total winnings?(c) How do your answers to parts (a) and (b) compare? What does this say about the riskiness of the two games?

Answer 1

Answer:

a) E(X) = -$0.0813 , s.d (X) = 3

b) E(X) = -$0.0813 , s.d (X) = 3

c) expected loss and higher stakes of loosing.

Step-by-step explanation:

Given:

- There are total 37 slots:

           Red = 18

           Black = 18

           Green = 1

- Player on bets on either Red or black

- Wins double the bet money, loss the best is lost

Find:

a) Expected value of earnings X if we place a bet of $3

b) Expected value and standard deviation if we bet $1 each on three rounds

c) compare the two answers in a and b and comment on the riskiness of the two games

Solution:

- Define variable X as the total winnings per round. We will construct a distribution tables for total winnings per round for bets of $3 and $ 1:

- Bet: $3

         X                   -3                          3                              E(X)

        P(X)           1-0.48 = 0.5135      18/37 = 0.4864    3*(.4864-.52135) = -0.08

-The s.d(X) = sqrt(9*(0.5135 + 0.4864) - (-0.08)^2) = 3.0

- Bet: $1

         X                   -1                          1                          E (X)      

        P(X)        1-0.48 = 0.5135      18/37 = 0.4864   1*(.4864-.5135) = -0.0271

-The s.d(X) = sqrt(1*(0.5135 + 0.4864) - (-0.0271)^2) = 0.999

- The expected value for 3 rounds is:

                       E(X_1 + X_2 + X_3) = E(X_1) + E(X_2) + E(X_3)

- The above X winnings are independent from each round, hence:

                       E(3*X_1) = 3*E(X_1) = 3*(-0.0271) = -0.0813

- The standard deviation for 3 rounds is:

              sqrt(Var(X_1 + X_2 + X_3)) = sqrt(Var(X_1) + Var(X_2) + Var(X_3))

- The above X winnings are independent from each round, hence:

                       sqrt(Var(3*X_1)) = 3*Var(X_1) = 3*(0.999) = 2.9988

- For above two games are similar with an expected loss of $0.0813 for playing the game and stakes are very high due to high amount of deviation for +/- $3 of winnings.