Risk Averse/Neutral in an Interview
Hey guys,
I have a couple of interviews coming up with prop trading shops and I was wondering how to answer the risk averse/neutral question.
Sometimes, they ask you this by giving two choices with the same expected value but different variance. What kind of traits are these firms looking for (averse vs neutral)? Thanks!
without volatility, there is no way to make money trading....so the more vol, the better. You can always trade smaller size if vol is very high. But if vol is zero...you are fucked...because you don't have infinite $$...unless you are a central bank.
Omg dude.
At a given expected return, you will ALWAYS prefer the least possible volatility. Always. Think about return per unit of risk.
Prop trading is all about taking calculated risks but prop firms are very much risk averse as they need capital to keep operating. I don't variance is a measure of risk they really care about but all else equal if you could choose two payoffs with the same EV the one with lower variance is better. Especially so if there is second order stochastic dominance. I think if your answers are consistent with some concave strictly increasing utility function over money they will be happy.
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