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REPORT

Gambling
Index

Part A – (Exercise 3)

1. Introduction
2. Simulation
3. Conclusion

Part B – (Exercise 4)

1. Introduction
2. Theoretical approach
i. a
ii. b
iii. c

Part C – (Exercise 5)

1. Introduction
2. Theoretical approach
i. a
ii. b

Part D – (Exercise 6)

1. Theoretical questions (handwritten)


Part A - (Exercise 3)

1. Introduction

In this exercise, and also in the following exercises, the European roulette is analysed. Aim
of exercise 3 is to determine the value of k (which stands for the winning amount) and the
value of θ (which stands for the probability of winning) so that it becomes advantageous to
play. To determine these values a simulation (playing 10 games 10000 times) is used.

2. Simulation

After having simulated 10 games 10000 times, the following values have been determined.

Expected win after 10 games


θ = 0.4 θ = 0.5 θ = 0.6
k = £0.5 -3.9748 -2.5602 -0.9990
k = £1 -2.0136 -0.0284 1.9758

3. Conclusion

As θ (the probability of winning) increases, the amount of won money increases too even if k
(the winning amount) is constant but at the probability of 0.6, the amount of won money is
still negative (lose). As k increases, the amount of won money increases too even if θ is
constant but the pairs of values of θ and k where it is advantageous to play are 0.6 and 1
respectively.

Part B - (Exercise 4)

1. Introduction

The question stated in exercise 3 applies to exercise 4 but in this part of the report no
simulation is used to determine θ and k. These values are calculated theoretically.

2. Theoretical approach

(a) Calculate the expected win after 1 game in terms of (θ, k).

As the game is played once, the Bernoulli random variable has to be considered.

E(Xi) = -1*(1 – θ) + k*θ = -1 + θ + k* θ = θ*(1 + k) -1

(b) Using the fact that each game is independent, calculate the expected win after 10
games in term of (θ, k).
(c) For a given value of θ, determine the range of values for k such that

 10*[ θ*(1 + k) – 1] > 0


 10*[ θ + θ*k - 1] >0
 10*θ + 10*k*θ – 10 > 0
 10*k*θ > 10 – 10*θ

 k > (10 – 10*θ) / (10*θ)

Part C- (Exercise 5)

1. Introduction

This exercise follows from the previous. The only difference being the generalisation.
Meaning that the game costs £c to play, the prize for winning is £k and the probability of
winning is θ.

1. Theoretical approach

(a) Calculate E(Xi) and

E(Xi) = -c*(1 – θ) + k*θ = -c +c*θ + k*θ = θ*(c + k) - c

(b) If k = c what is the range of values for θ that satisfy

θ*(c + c) – c > 0
 θ*(2*c) – c > 0
 θ*(2*c) > c

 θ > c / (2*c)
Part D - (Exercise 6)

1. Theoretical questions (handwritten)