Question

"A prediction market has been formed through which participants can bet with each other on the outcomes of the World Cup. One security in this market is priced at $30. This security gives its owner the right to $100 if Country A wins the World Cup and $0 otherwise. Which of the following is true?"

Answer 1

Answer:

Explanation:

The expected payoff from betting

E= Prob(win) * Payoff (win)+Prob(loose)* Payoff(loose)

Let p be the probability of win.

E = p*100+(1-p)*0  =100p

Cost of betting = $30

Betting is profitable if 100p>=30

p>=30/100

p>=0.3

If p>=0.3, then betting happens.