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Probability Concepts Flashcards

1. Define a random variable, an outcome, an event, mutually exclusive events, and exhaustive events. 2. State the two defining properties of probability and distinguish among empirical, subjective, and a priori probabilities. 3. State the probability of an event in terms of odds for and against the event. 4. Distinguish between unconditional and conditional probabilities. 5. Explain the multiplication, addition, and total probability rules. 6. Identify the most appropriate method

1
Q

Random Variable

A

A random variable is an uncertain quantity/number.

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2
Q

Outcome

A

An outcome is an observed value of a random variable.

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3
Q

Event

A

An event is a single outcome or a set of outcomes.

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4
Q

Mutually Exclusive Events

A

Mutually exclusive events are events that cannot both happen at the same time.

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5
Q

Exhaustive Events

A

Exhaustive events are those that include all possible outcomes.

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6
Q

Two Defining Properties of Probability

A

There are two defining properties of probability:

  1. The probability of occurrence of any event is between 0 and 1.
  2. If a set of events, E1, E2, … En, is mutually exhaustive, the probabilities of those events sum to 1.
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7
Q

Empirical Probability

A

An empirical probability is established by analyzing past data.

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8
Q

Priori Probability

A

A priori probability is determined wing a formal reasoning and inspection process.

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9
Q

Subjective Probability

A

A subjective probability is the least formal method of developing probabilities and involves the use of personal judgment.

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10
Q

Unconditional probability

A

(a.k.a. marginal probability) refers to the probability of an event regardless of the past or future occurrence of other events.

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11
Q

Conditional Probability

A

A conditional probability is one where the occurrence of one event affects the probability of the occurrence of another event.

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12
Q

Multiplication Rule of Probability

A

This is used to determine the joint probability of two events:

P(AB) = P(A I B) X P(B)

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13
Q

Addition Rule of Probability

A

This is used to determine the probability that at least one of two events will occur:

P(AorB) = P(A) + P(B) - P(AB)

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14
Q

Total Probability Rule

A

This is used to determine the unconditional probability of an event, given conditional probabilities:

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15
Q

Independent Event

A

Independent events refer to events for which the occurrence of one has no influence on the occurrence of the others.

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16
Q

conditional expected values

A

conditional expected values are contingent upon the outcome of some other event

17
Q

Covariance

A

Covariance is a measure of how two assets move together. It is the expected value of the product of the deviations of the two random variables from their respective expected values.

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