calculate the beta of roulette
I've heard interview questions where the interviewee is asked to calculate the beta of roulette. Does anyone know the answer to this question? I assume it would be 0 because the outcome of roulette has no correlation with the market...
Not sure if serious....
he's correct.
Zero makes sense. Beta is in itself a hazy concept... and a roulette wheel has nothing to do with the market.
Roulette's beta would be the covariance of roulette with the market divided by the market's variance
The covariance of roulette to the market is 0, as their returns are totally independent of each other
If you really wanted, I suppose you could invent a "market" that would make sense to use in conjunction with roulette. For example, you could define "market" returns as the aggregate returns from playing several casino games, and then compare roulette's return to this "market" return to find beta.
0 is correct?
Yes, I got asked the same question in an interview except it was with a slot machine. I answered 0 and he said I was right.
assets with only idiosyncratic risk that aren't correlated with the market...have a beta of 0.
it makes sense, especially when you consider that such idiosyncratic risk can be effectively removed through diversification, so it shouldn't be taken into account if you're doing CAPM anyways. CAPM cares about systemic market risk that can't really be removed just through diversification...
Maybe slightly negative beta as the market has a slightly positive EV and roulette has negative EV?
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