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(8) Probability Concepts
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Terms in this set (20)
What is the sum of the probabilities of a set of events if they are mutually exclusive and exhaustive?
1
What is an Empirical Probability?
Probability established by analyzing past data
What is an A Priori Probability?
A Probability determined using a formal reasoning and inspection process
What are the three rules of Probability?
Multiplication, Addition, and Total
Multiplication Rule (Joint Probability) : P(AB)
P(A|B) × P(B)
Addition Rule: P(A or B)
P (A) + P (B) - P (AB)
Total Probability Rule: P(A)
P(A|B1) × P(B1) +P(A|B2) × P(B2)
Joint Probability when events are not mutually exclusive: P(A or B)
P(A) + P(B) - P(AB)
Expected Value of Probability: E(X)
Covariance Definition
Measure of how two assets move together
Ranges from - Infinity to + infinity
Covariance Formula for Probabilities: Cov(Ri,Rj)
Cov(Ri,Rj)= E([Ri-E(ri)]×[Rj-E(Rj)])
Correlation Coefficient: Corr(Ri,Rj)
Cov(Ri,Rj)/Std(Ri)×Std(Rj)
What value do you use when calculating value of a portfolio?
Market Value
Expected Return of Portfolio: E(Rp)
Portfolio Variance
What is Bayes formula used for?
Used to update a given set of prior probabilities for a given event in response to the arrival of new information
Bayes Formula
Labeling
Refers to the situation where there are n items that can each receive one of K different labels
Combination Formula
A formula for the number of possible combinations of r objects from a set of n objects
ORDER DOES NOT MATTER
Permutation Formula
Order Matters
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