Is the Strategy Real or Lucky

A researcher shows you a strategy with 60 60 winning trades out of 100 100 . Take the world to contain only two kinds of strategy: real ones, which win each independent trade with probability 0.55 0.55 , and worthless ones, which win with probability 0.50 0.50 . From experience you believe only 1 1 submitted strategy in 5 5 is real.

(a) After seeing 60 60 wins in 100 100 trades, what is the probability this strategy is real? (b) The researcher points out the result is "statistically significant at two sigma." Reconcile that with your answer. (c) Roughly how many trades would a genuinely real strategy need before you were 95% 95\% convinced?

Answer

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