Probability Concepts Flashcards
The return on a risky asset is an example
of a _______, a quantity whose outcomes (possible values) are _______.
random variable, uncertain
An _____ is a specified set of outcomes
event
_______ means that the events cover all possible outcomes
exhaustive
s. In
investments, we often estimate the probability of an event as a relative frequency of occurrence based on historical data. This method produces an _________
empirical probability
We may make a personal assessment of a probability. This probability is a _____.
subjective probability
In a more narrow range of well- defined problems, we can sometimes deduce
probabilities by reasoning about the problem. The resulting probability is an ___________.
a priori probability
The odds for E are the probability of E divided
by 1 minus the probability of E. In the example, the statement that the odds for the company’s EPS for FY2019 beating
$2.20 are 1 to 7 means that the speaker believes the probability of the event is
1/(1 +7) = 1/8 = 0.125
a trade in two closely related stocks involving the short sale of one and
the purchase of the other
pairs arbitrage trade
The conditional probability of A given
that B has occurred is equal to ________
the joint probability of A and B divided by the
probability of B (assumed not to equal 0).
P(A or B) =
P(A) + P(B) – P(AB)
This rule explains the unconditional probability of the event in terms of probabilities conditional
on the scenarios.
total probability rule
Definition of covariance
Cov(x,y) = E[(x-Ex)(y-Ey)]
Definition of correlation
Corr(x,y) = Cov(x,y)/[sd(x)sd(y)]
a graph that shows the relationship between the observations for two data series in
two dimensions
scatter plot
Bayes’ Theorem
P(A|B) = P(B|A)P(A)/P(B)
