8.3: Portfolio Variance, Bayes, and Counting Problems Flashcards
How is the portfolio weight for each asset established?
Weight of portfolio asset i = market value of investment in asset i / market value of the portfolio
How is the expected value of a portfolio represented?
The expected value of a portfolio can be determined using the sum of weight times the expected return.
How is portfolio variance calculated based on a probability model?
Variance of the portfolio return is:
** see equation
What is Baye’s formula?
Bayes’ formula is used to update a given set of prior probabilities for a given event in response to the arrival of new information.
The rule for updating prior probability of an event is:
Updated probability = (probability of new information for a given event/unconditional probability of new information) x prior probability of event
What is labeling?
Labeling refers to the situation where there are n items that can each receive one of k different labels (factorial).
How do you calculate factorial on the TI calculator?
On the TI: [2nd][x!]
When is the labeling formula used? How is it calculated?
Labeling formula applies to three or more subgroups of predetermined size. Each element of the entire group must be assigned a place, or label, in one of the three or more subgroups.
Labeling formula = n!/n1! x n2! x … x (nk!)
When is combination formula used? How is it calculated on TI?
Combination formula, also known as binomial formula, applies to only two groups of predetermined size. order does not matter; look for the word “choose” or “combination”.
nCr = n!/(n - r)!r!
(insert n) [2nd] [nCr] (insert r) [=]
When is permutation formula used and how is it calculated (2)? How is it calculated on TI?
Permutation formula applies to only two grounds of predetermined size. The order is important.
The number of permutations of r objects from n objects
nPr = n!/(n - r)!
nPr = r! x nCr
On the TI: (insert n) [2nd] [nPr] (insert r) [=]
When is factorial used? How is it calculated?
Factorial is used by itself when there are no groups and simply only arranging a given set of n items.
Given n items, there are n! ways for arranging them.
