Independent and identically distributed random variables

2 articles

Combinatorics & Discrete Math LycéeExplication10 min

Ten to One on Four Coin Calls Costs 31 Cents on the Dollar

One chance in sixteen needs fifteen to one to break even, so a ten-to-one ticket is priced as though the calls came right nine times in a hundred rather than six and a quarter. The fair payout doubles and adds one with every leg, which is why multi-leg tickets run away from any quote a seller offers. The article carries the noise that hides the loss, 2.663 of spread against 0.3125 of edge, and the five-point edge per leg that would flip the verdict.

Probability & Statistics LicenceExplication10 min

Four Years of Risk Is Twenty Percent, Not Forty

The standard deviation of a sum is not the sum of the standard deviations, so quadrupling the horizon only doubles the risk. The article carries the general square-root law, the ratio that diagnoses the mistake, and the controls showing a bell curve does none of the work: a two-point yearly return lands on 0.20026 and a uniform one on 0.20008. It also carries what actually breaks the rule, which is dependence rather than fat tails.