Dataford
Interview QuestionsInterview GuidesExperiencesMock InterviewsPricing
Get started

Expected Value Pricing for Biased Coin

EasyStatistics & Probability00:00
Practice interviewer
In session
5 left
00:00

Your question is Expected Value Pricing for Biased Coin. Take a moment with it on the right.

Talk me through your thinking if you like. When you're confident, submit your answer and I'll grade it like a real screen (7/10 or better passes).

You need to log in / sign up to chat or submit.

Problem

Business Context

A gaming startup, FairPlay Labs, is evaluating whether a coin-flip game is attractive to users while remaining economically fair. A player pays a fixed entry fee to play 100 flips of a biased coin that lands heads 60% of the time.

Problem Statement

For each flip, the player wins \1foraheadandloses1 for a head and loses \\1foraheadandloses1 for a tail. Determine the fair price a rational player should be willing to pay for one 100-flip game, and quantify the variability of outcomes.

Given Data

MetricValue
Probability of heads0.60
Probability of tails0.40
Payoff for head+\$1
Payoff for tail-\$1
Number of flips per game100

Let XiX_iXi​ be the payoff from flip iii, and let total game payoff be S=∑i=1100XiS = \sum_{i=1}^{100} X_iS=∑i=1100​Xi​.

Requirements

  1. Compute the expected payoff for a single flip.
  2. Compute the expected payoff for the full 100-flip game.
  3. Compute the variance and standard deviation of a single flip.
  4. Compute the variance and standard deviation of the 100-flip total payoff.
  5. State the maximum fair entry price a risk-neutral player should pay.
  6. Briefly explain how the answer would differ for a risk-averse player.

Assumptions

  • Coin flips are independent.
  • The 60% head probability is known and stable.
  • The player is risk-neutral unless otherwise stated.
  • Ignore discounting, transaction costs, and utility curvature unless explicitly discussing risk aversion.