Agenda

Long-term vs. short-term goals

– Investment wheel
– Volatility pumping
 Investment Wheel
• You are able to place a bet on any of the
three sectors of the wheel.

• You may invest different amounts on each

$3 of the sectors independently.

• The numbers in the sectors denote the

winnings for that sector after the wheel is
$6 spun.
$2
• If the wheel stops with the pointer at the
top sector after a spin, you will receive $3
for every $1 you invested on that sector.
 Investment Wheel

• What is the expected gain if you bet $1 on

the top sector?
$3 • How about the lower left sector? And the
lower right sector?

• What is the optimal strategy if you have

$6 $100 and are allowed to bet only once?
$2
Investment Wheel: Long Term Strategy

• Start with $100

• bet part or all your money repeatedly

$3
• bet different amounts on each of the three
sectors independently

$6 • Reinvest winnings on successive spins

$2
• What is the optimal strategy to maximize
long-term return?
Investment Wheel: The Unfavorable Sector

• We shall verify (later) that Strategy 3 is

actually the best fixed-proportion strategy
for long-term growth.
$3
• It invests 0.333 of total funds in the Lower
Left Sector, which is the unfavorable one
(the expected return is negative)
$6
$2 • Why do we want to invest in the
unfavorable sector?
 Three Strategies
Strategy 1: Bet all on the top sector
Strategy 2: Bet 50% on the top sector, 50% is held in reserve
Strategy 3: Bet 50% on the top, 1/3 lower left, 1/6 lower right

A B C D E F G H I J K
1
2
3 Revenue Profit Prob. Error^2
=SUMPRODUCT(B4:B5,C4:C5)
4 3 2 0.500 2.25 Mean 0.500
=SQRT(AVERAGE(D4:D5))
5 0 -1 0.500 2.25 StDev 1.500
6
=(B7-G7)^2
7 2 1 0.333 1.7778 Mean -0.333
8 0 -1 0.667 0.4444 StDev 1.054
9
10 6 5 0.167 25 Mean 0.000
11 0 -1 0.833 1 StDev 3.606
 Simulation “by Hand”

A B C D E F G H I
1 ROI
2 Payoff Table Top
3 1 2 3 1
=1/6
4 Prob 0.500 0.333 0.167 Prob 0.500
=SUMPRODUCT(K5:K8,$D$12:$D$15)-1
5 Strategy 1 200% -100% -100% Top $3.00
=SUMPRODUCT(K5:K8,$H$12:$H$15)-1
6 Strategy 2 100% -50% -50% Lower Left $0.00
=SUMPRODUCT(K5:K8,$L$12:$L$15)-1
7 Strategy 3 50% -33% 0% Lower Right $0.00
 A B C D E F G H I
7 Strategy 3 50% -33% 0% Lower Right $0.00
8 Reserve $1.00
9 Exp. Return 50%
10
11 Allocations Strategy 1 Strategy 2
12 Top 1.000 0.500
13 Lower Left 0.000 0.000
14 Lower Right 0.000 0.000
15 Reserve 0.000 0.500
16 EMV (1 round) =RAND()
=IF(B20<$C$4,$C$3,IF(B20<SUM($C$4:$D$4),$D$3,$E$3))
17
18 Round ~U(0, 1) Outcome Start ROI End Start ROI
19 0 =F19 $100.00
=D20*(1+E20)
20 1 0.226 1 $100.00 200% $300.00
21 2
22 3
=HLOOKUP(C20,$C$3:$E$7,3,0)
23 4
 G H I J K L
11 Strategy 2 Strategy 3
12 0.500 0.500
13 0.000 0.333
14 0.000 0.167
15 0.500 0.000
16
17
18 Start ROI =J19 End=HLOOKUP(C20,$C$3:$E$7,4,0)
Start
19 $100.00
=H20*(1+I20)
20 $100.00 -50% $50.00
 A B C D E F G H I J K L M N
1 ROI Wheel
2 Payoff Table Top Lower Left Lower Right
3 1 2 3 1 2 3
4 Prob 0.500 0.333 0.167 Prob 0.500 0.333 0.167
5 Strategy 1 200% -100% -100% Top $3.00 $0.00 $0.00
6 Strategy 2 100% -50% -50% Lower Left $0.00 $2.00 $0.00
7 Strategy 3 50% -33% 0% Lower Right $0.00 $0.00 $6.00
8 Reserve $1.00 $1.00 $1.00
9 Exp. Return 50% -33% 0%
10
11 Allocations Strategy 1 Strategy 2 Strategy 3
12 Top 1.000 0.500 0.500
13 Lower Left 0.000 0.000 0.333
14 Lower Right 0.000 0.000 0.167
15 Reserve 0.000 0.500 0.000
16 EMV (1 round)
17
Investment Wheel
18 Round ~U(0, 1) Strategy
Outcome 1 Start ROI End Start ROI End Start ROI End
19 0 $5,000 $100.00 $100.00 $100.00
$4,500 Strategy 2
20 1 0.055 1 $100.00 200% $300.00 $100.00 100% $200.00 $100.00 50% $150.00
$4,000
21 2 $3,500
0.333 Strategy 3 1 $300.00 200% $900.00 $200.00 100% $400.00 $150.00 50% $225.00
22 3 $3,000 0.959 3 $900.00 -100% $0.00 $400.00 -50% $200.00 $225.00 0% $225.00
23 4 $2,500 0.735 2 $0.00 -100% $0.00 $200.00 -50% $100.00 $225.00 -33% $150.00
24 5 $2,000 0.106 1 $0.00 200% $0.00 $100.00 100% $200.00 $150.00 50% $225.00
25 6 $1,500 0.180 1 $0.00 200% $0.00 $200.00 100% $400.00 $225.00 50% $337.50
$1,000
26 7 0.339 1 $0.00 200% $0.00 $400.00 100% $800.00 $337.50 50% $506.25
$500
27 8 0.600 2 $0.00 -100% $0.00 $800.00 -50% $400.00 $506.25 -33% $337.50
$0
28 9 00.802 5 10 2
15 20$0.0025 -100%
30 35 $0.00
40 45 50$400.00 -50% $200.00 $337.50 -33% $225.00
29 10 0.195 1 $0.00 200% $0.00 $200.00 100% $400.00 $225.00 50% $337.50
30 11 0.802 2 $0.00 -100% $0.00 $400.00 -50% $200.00 $337.50 -33% $225.00
31 12 0.014 1 $0.00 200% $0.00 $200.00 100% $400.00 $225.00 50% $337.50
32 13 0.307 1 $0.00 200% $0.00 $400.00 100% $800.00 $337.50 50% $506.25
33 14 0.294 1 $0.00 200% $0.00 $800.00 100% $1,600.00 $506.25 50% $759.38
34 15 0.777 2 $0.00 -100% $0.00 $1,600.00 -50% $800.00 $759.38 -33% $506.25
35 16 0.531 2 $0.00 -100% $0.00 $800.00 -50% $400.00 $506.25 -33% $337.50
36 17 0.416 1 $0.00 200% $0.00 $400.00 100% $800.00 $337.50 50% $506.25
37 18 0.092 1 $0.00 200% $0.00 $800.00 100% $1,600.00 $506.25 50% $759.38
38 19 0.006 1 $0.00 200% $0.00 $1,600.00 100% $3,200.00 $759.38 50% $1,139.06
39 20 0.669 2 $0.00 -100% $0.00 $3,200.00 -50% $1,600.00 $1,139.06 -33% $759.38
40 21 0.522 2 $0.00 -100% $0.00 $1,600.00 -50% $800.00 $759.38 -33% $506.25
41 22 0.839 3 $0.00 -100% $0.00 $800.00 -50% $400.00 $506.25 0% $506.25
42 23 0.449 1 $0.00 200% $0.00 $400.00 100% $800.00 $506.25 50% $759.38
43 24 0.060 1 $0.00 200% $0.00 $800.00 100% $1,600.00 $759.38 50% $1,139.06
44 25 0.445 1 $0.00 200% $0.00 $1,600.00 100% $3,200.00 $1,139.06 50% $1,708.59
45 26 0.113 1 $0.00 200% $0.00 $3,200.00 100% $6,400.00 $1,708.59 50% $2,562.89
46 27 0.129 1 $0.00 200% $0.00 $6,400.00 100% $12,800.00 $2,562.89 50% $3,844.34
47 28 0.940 3 $0.00 -100% $0.00 $12,800.00 -50% $6,400.00 $3,844.34 0% $3,844.34
48 29 0.311 1 $0.00 200% $0.00 $6,400.00 100% $12,800.00 $3,844.34 50% $5,766.50
49 30 0.808 2 $0.00 -100% $0.00 $12,800.00 -50% $6,400.00 $5,766.50 -33% $3,844.34
50 31 0.627 2 $0.00 -100% $0.00 $6,400.00 -50% $3,200.00 $3,844.34 -33% $2,562.89
51 32 0.997 3 $0.00 -100% $0.00 $3,200.00 -50% $1,600.00 $2,562.89 0% $2,562.89
52 33 0.590 2 $0.00 -100% $0.00 $1,600.00 -50% $800.00 $2,562.89 -33% $1,708.59
53 34 0.673 2 $0.00 -100% $0.00 $800.00 -50% $400.00 $1,708.59 -33% $1,139.06
54 35 0.081 1 $0.00 200% $0.00 $400.00 100% $800.00 $1,139.06 50% $1,708.59
55 36 0.941 3 $0.00 -100% $0.00 $800.00 -50% $400.00 $1,708.59 0% $1,708.59
56 37 0.186 1 $0.00 200% $0.00 $400.00 100% $800.00 $1,708.59 50% $2,562.89
57 38 0.815 2 $0.00 -100% $0.00 $800.00 -50% $400.00 $2,562.89 -33% $1,708.59
58 39 0.566 2 $0.00 -100% $0.00 $400.00 -50% $200.00 $1,708.59 -33% $1,139.06
59 40 0.683 2 $0.00 -100% $0.00 $200.00 -50% $100.00 $1,139.06 -33% $759.38
60 41 0.317 1 $0.00 200% $0.00 $100.00 100% $200.00 $759.38 50% $1,139.06
61 42 0.842 3 $0.00 -100% $0.00 $200.00 -50% $100.00 $1,139.06 0% $1,139.06
62 43 0.698 2 $0.00 -100% $0.00 $100.00 -50% $50.00 $1,139.06 -33% $759.38
63 44 0.805 2 $0.00 -100% $0.00 $50.00 -50% $25.00 $759.38 -33% $506.25
64 45 0.375 1 $0.00 200% $0.00 $25.00 100% $50.00 $506.25 50% $759.38
65 46 0.068 1 $0.00 200% $0.00 $50.00 100% $100.00 $759.38 50% $1,139.06
66 47 0.919 3 $0.00 -100% $0.00 $100.00 -50% $50.00 $1,139.06 0% $1,139.06
67 48 0.231 1 $0.00 200% $0.00 $50.00 100% $100.00 $1,139.06 50% $1,708.59
68 49 0.714 2 $0.00 -100% $0.00 $100.00 -50% $50.00 $1,708.59 -33% $1,139.06
69 50 0.129 1 $0.00 200% $0.00 $50.00 100% $100.00 $1,139.06 50% $1,708.59
 Three Strategies
Strategy 1: Bet all on the top sector
Strategy 2: Bet 50% on the top sector, 50% is held in reserve
Strategy 3: Bet 50% on the top, 1/3 lower left, 1/6 lower right

Investment Wheel
Strategy 1
$5,000
$4,500 Strategy 2
$4,000
Strategy 3
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
0 5 10 15 20 25 30 35 40 45 50
 Another Run

Investment Wheel
Strategy 1
$5,000
$4,500 Strategy 2
$4,000
Strategy 3
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
0 5 10 15 20 25 30 35 40 45 50
Strategy 1: Surprisingly ineffective at building wealth
Strategy 2: Better; similar to volatility bumping
Strategy 3: Seems to do the best most of the time

This methodology is revealing, but tedious.

Hard to keep track of the results.