Value and Return on Investment
Value and ROI (Return On Investment) are very closed related and sometimes meaning the same thing.
Assume we have a model that can calculate the true odds (sometimes referred to fair odds), if the model says that the true odds is 2.00 and bookie gives us the odds of 2.20 - this would be a value bet! The ratio between the bookie odds and the true odds would be the value expressed as an increasing factor i.e 1.10 or if you just what the increase in decimal form 1.10 - 1 = 0.1 or in percentage (%) 0.1*100 % = 10%. So we see that value can be expressed in different forms all with the same meaning.
The return on investment (ROI) is a simple and good measure and could be described as the “value” of your strategy. It is calculated as the ratio between net profit and the total amount invested (sum of all bets). So for example if you make 1000 bets all with the same amount of 3 units and your net profit is 333 units would give you an ROI of 333 / (3 x 1000) = 0.111 = 11.1 %.
Why is the measure of ROI better then just say “I have a strategy that make profit” or “I have an edge trust me” or “I make 3 units a day”. First of all ROI gives the value of you strategy and it shows have efficient it is compared with other strategies, secondly if you know your ROI you can simply calculate you expected profit in units (or in any currency you like) just my multiplying the ROI with your turnover. So by using ROI you can decide how much you will earn if the market have enough liquidity.
[Net profit] = [ROI] x [Turnover]
