A trader invented a strategy where he can either win or lose a certain amount of money every day (say, k dollars) with equal probability, independently of all other days. (In fact, such a strategy is not very difficult to implement - buy a very liquid asset whose price moves without major jumps and liquidate the position as soon as you are making or losing k dollars). He then made the following statement: “If I use my strategy every day for the next 400 days, my chances of staying within 10,000 dollars of the original account balance are equal to 1/3. (a) What is k (approximately)? (b) What are his chances (approximately) of making over 20,000 with this strategy in 400 days?

2. This year Karen has decided to diversify her business by growing broc- coli as well as lettuce. Karen plants lettuce with a probability of or broccoli with a probability of . By the time these plants are ready to harvest the price of lettuce increases with a probability of and decreases with a probability of 3. The price of broccoli increases with a probability of , decreases with a probability of or stays the same with a probability of . (a) Draw a probability tree for this scenario. (b) Use the probability tree to determine the probability that Karen plants broccoli and that the price of broccoli increases by the time it is ready to harvest. (c) Use the probability tree to determine the probability that the price of whatever Karen plants increases by the time it is ready to harvest. (d) Calculate Pr(Price of lettuce does not change | Karen plants lettuce). (e) Calculate Pr(Price of broccoli does not changen Karen plants broccoli).

nvesting: Inverse ETFs (Exchange Traded Funds)   Inverse ETFs, sometimes referred to as "bear market" or "short" funds, are designed to deliver the opposite of the performance of the index or category they track, and so can be used by traders to bet against the stock market. The following table shows the performance of three such funds as of August 5, 2015.†   Year-to-DateLoss (%) MYY (ProShares Short Midcap 400) 6 SH (ProShares Short S&P 500) 5 REW (ProShares UltraShort Technology) 7 You invested a total of $8,000 in the three funds at the beginning of 2011, including an equal amount in SH and REW. Your year-to-date loss from the first two funds amounted to $340. How much did you invest in each of the three funds? MYY$ SH$ REW$

Suppose you are deciding whether or not to bring an umbrella to school and the weathercan be either sunny or rainy. Initially, you think the probability that it will be sunny isP (S) = 0.6, and the probability that it will be rainy is P (R) = 0.4. If you bring an umbrellaand it rains, your payoff is 6. If you bring an umbrella and it is sunny, your payoff is 9. Ifyou don’t bring an umbrella and it rains, your payoff is 0. If you don’t bring an umbrellaand it is sunny, your payoff is 10. Suppose that you check two websites for weather forecasts.You know that the two forecasts are independent of each other, and each forecast is correct70% of the time. That is, the probability that the website says it will be sunny given that itactually will be sunny is 0.7, and the probability that the website says it will rain given thatit actually will rain is 0.7. Suppose that you suffer from confirmation bias. You initially thinkit is more likely to be sunny, so you misinterpret rain forecasts as sun…