Lecture 7: Probability & Business Investment Decision

Question 1

Probability

Answer 1

-A mathematical concept describing how likely an outcome is to occur
-expressed as fractions, decimals, or percentage
-the common measurement for a probability is between 0 and 1 or 0% and 100%

Question 2

Objective vs. Subjective

Answer 2

Objective probability- based on equal OUTCOMES (2 outcomes for tossing a coin) or using EXPERIMENTATION of previous attempts as a basis to guess the outcome
Subjective probability- draws are on the personal opinions of people

Question 3

2 Kinds of Objective Probability

Answer 3

Theoretical- uses logical reasoning (no. Of favourable outcomes/ no. If possible outcomes) e.g. 50% chance of getting heads
Experimental- determined in the basis of a series of experiments (coin tossed 20 times, heads = 12, tails=8, thus 12/20= .6,
6/20= .4

Question 4

Laws of Probability: Addition Law & Equation

Answer 4

The probability that either event A or B will happen
P(A OR B) = P(A) + P(B) - P (A and B)
* pay attention to whether you’re looking for P(A or B) vs. P(A and B). You’ll get a different number

Question 5

Venn Diagram

Answer 5

Union- P (A U B) = P (A) + P(B) - P(A n B)
KEYWORD: ____ or_____
Intersection- P (A n B)
KEYWORD: _____ and ______
[Complement- A’ is the complement to the set A and it contains all of the values in the universal set that are not in the set A)

Question 6

Forecasting (what are we predicting?)

Answer 6

-consists of multiple methods to predict FUTURE SALES, EXPENSES, & CAPITAL COSTS
-BUSINESS FORECASTING: involves making informed guesses about certain projection metrics

Question 7

The Choice of Forecasting Methods depends on

Answer 7

Often depends on projection terms (I.e. short/medium/long), data available, accuracy, time, cost & expertise

Question 8

2 Kinds of Quantitative Forecasting Methods

Answer 8

MOVING AVERAGE: taking the average of previous periods to forecast the future (can be used for metrics: scales, profits, expenses)
STRAIGHT LINE: assumes a company’s historical growth rate will remain constant (e.g. 12% pa)

Question 9

Stock Market Participants

Answer 9

-Regulator
-Market Intermediaries
Stock Exchanges
-Companies
-Investors & Traders

Question 10

Fixed Income vs. Equity Products

Answer 10

FIXED INCOME- GICs, bonds, savings account
EQUITY PRODUCTS-stocks & ETFs

Question 11

Quantitative investment concept

Answer 11

In securities, generally involves analysis of potential returns via picking and purchasing stocks to generate profits (difference between buying and selling price)

Question 12

[QUANTITATIVE INVESTMENT CONCEPT] Factors to Observe: Basic Moving Average forecast of Public-traded companies (3)

Answer 12

• Income Statement (revenue > operating expenses)
  -Balance Sheet (assets> liabilities)
  -Cash Flow (+/- net cash)

Question 13

[QUANTITATIVE INVESTMENT CONCEPT] Factors to Observe: Basic Straight Line forecast of Equity Market (2)

Answer 13

-A stock’s historical annual performance (% of gain/loss)
-Index (e.g. TSX Composite Index has average yearly return of 7.94% betw. 1971-2021)