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What this expected-value pricing question tests

This is a foundational pricing and expected value question that appears frequently in quant finance interviews. It tests whether you can apply probability-weighted outcomes to derive a fair price in the face of binary risk, a core skill for traders and researchers evaluating assets before news events.

The question strips away market microstructure and focuses on the core principle: a fair price today should equal the probability-weighted average of tomorrow's possible prices, given the stated probabilities. The challenge is less computational than conceptual—understanding when and why you should use expected value as a pricing tool, and recognizing that this assumes risk-neutral or fair-game pricing.

• Expected value and fair-game hypothesis
• Binary outcome scenarios and probability weighting
• Distinction between fair price and market price