Hey Guys,

People like new things.

Whether it’s a new car or a new house, the idea of encountering a newly acquired item is an exciting prospect. Similarly, IPOs (Initial Public Offerings) happen when private companies go public and schmucks like you and me can buy their stock. Today, we’re not talking about new convertibles or Noodles & Company IPO stock. We’re talking about investing in NBA rookies- an equally exciting unknown.

As my common courtesy to you, I present to you Vegas’ current lines for the 2013-2014 NBA Rookie of the Year:

As you can see, the early favorites for the achievement are 1) Victor Oladipo +400, 2) Trey Burke +450, tied for 3) Ben McLemore and Kelly Olynyk +800 and tied for 4) Cody Zeller and C.J. McCollum +1000.

Being the giving guy that I am, I’m going to devise a hedge for you that provides you the optimal risk/reward scenario. If you haven’t figured it out by now, we’re devising a healthy portfolio of NBA rookies. This is some financial engineering shit. Albeit, in its most basic form.

To start off, it is essential that we take some of (if not) all of the favorites. Our blue chip stocks. For me, the only top five favorite that I’ll be leaving off is C.J. McCollum. While I don’t doubt McCollum possesses the skill and ability to thrive in the NBA, I just don’t see the youngster getting the ample run necessary to obtain the award. In a backcourt featuring Damian Lillard, it’s gonna be tough for the Lehigh alum to shine. The other five noted above are locks for part of our hedge.

Secondly, we need to scan the list for some “spec” plays. By carefully investing in some speculative names, we can bolster our Risk/Reward ratio. At 15-1, Anthony Bennett (the #1 selection in this year’s NBA Draft) could be worth the risk. While he might have a nagging shoulder injury, scouts have proclaimed him the most NBA-ready prospect. Michael Carter Williams is the only show in Philly right now with Nerlens Noel recovering from ACL surgery. Also at 15-1, MCW might be worth a shot too.

Notable players I don’t like:

Alex Len (20-1)- Big men take a lot of time to develop.

Otto Porter (12-1)- He won’t put up the stats necessary to win.

Shabazz Muhammad (15-1)- I think that Kevin Martin sees the majority of the minutes there. He’s not a good enough shooter to excel next to Ricky Rubio.

My Homerun pick: Dennis Schroeder (30-1) on Atlanta has already been compared to Tony Parker. Even if Jeff Teague stays healthy, it’s sounding like the German will get enough time on the court. Nevertheless, this one’s all or nothing.

At 8-1, betting the field (remaining players not listed) can be helpful but unnecessary. I’d be more inclined to include this entry into our hedge in a baseball bet. Baseball minor league systems feature thousands of prospects, making it harder to predict who will thrive given an opportunity.

I think we’re ready to set up the optimal risk/reward strategy. Get your calculators out.

Remember, our list includes: Oladipo (4-1), Burke (9-2), McClemore (8-1), Olynyk (8-1), Zeller (10-1), Bennett (15-1), MCW (15-1) and Schroeder (30-1). For the sake of convenience, say you had a grand to “invest” in this portfolio.

According to Vegas, the probabilities of these players actually winning the award go as followed: Oladipo (20%), Burke (18.2%), McClemore (11.1%), Olynyk (11.1%), Zeller (9.1%), Bennett (6.25%), MCW (6.25%) and Schroeder (3.23%).

Next, we proceed to allocate our $1000 according to these probabilities. Take a look:

Under this model, we could win (at most) $967.74 for risking $852.21. Under the most likely scenario, we would have actually lost money (winning $800 if Oladipo won compared to risking the $852.21.) Keep in mind we didn’t use the full $1000 in this scenario; by leaving out certain players, we only encompassed 85.221% of the outcomes.

In this case, our optimal strategy would have produced a $1.14/$1 Reward/Risk ratio (if Schroeder wins). But the odds of that happening are astronomically low at 3.22%. Therefore, we need to look at the expected value (EV) of this scenario. Our EV would be $737.34 if we risked $852.21. Looks like a negative return of 13.5% to me.

Thus, we need to construct our own risk tolerance model. Here’s mine:

To bolster my return, I’m going to risk more of the $1000. In doing so, I need to create my own probabilities of the given outcomes occurring. Note: this is fundamentally incorrect. The chances that somebody who is not on my list wins the ROY are greater than 1%. While this is a bit arbitrary, I decided to go with this apportionment: Oladipo (25%), Burke (20%), McClemore (11%), Olynyk (14.5%), Zeller (13.5%), Bennett (8%), MCW (5%) and Schroeder (2%).

In my case, my optimal strategy would have produced a $1.36/$1 Reward Risk ratio (if Zeller wins). The odds of this happening, according to my model, are 13.5%. That’s a hell of a lot better than Vegas’s 3.22%.

The expected value of my setup was a positive return of 3%. You also have to remember that we lose everything if none of these outcomes occur. Therefore, my upside is roughly only about $30 and my downside is losing $1000. This is why Vegas always wins.

Anyways, I hope you were able to stick with my tangential thought-process and are able to set up your own model that’s probably better than mine. Remember, this is just another (Editor’s note: the only) way for me to enjoy watching basketball. Money makes everything fun.

Toodles,

Stavster