Quant Probability Concepts Flashcards
A priori probability
A probability based on logical analysis rather than on observation or personal judgement.
Addition rule for probabilities
A principle stating that the probability that A or B occurs equals the probability that A occurs plus the probability that B occurs minus the probability that both A and B occur
Combination
A listing in which the order of the listed items does not matter
Complements
Goods that tend to be used together; technically, two goods whose cross-pride elasticity of demand is negative.
Conditional expected value
The expected value of a stated event given that another event has occurred
Conditional Probability
The probability of an event given (conditioned on) another event.
Conditional Variances
The variance of one variable, given the outcome of another
Consistent
With reference to estimators, describes an estimator for which the probability of estimates close to the value of the population parameter increases as sample size increases
Correlation
A number between -1 and +1 that measures the comovement (linear association) between two random
variables
Covariance Matrix
A matrix or square array whose entries are covariances; also known as a variance-covariancd matrix
Dependent
With reference to events, the property that probability of one event occurring depends on (is related to) the occurrence of another event
Diffuse prior
The assumption of equal prior probabilities
Dutch book theorem
A result in probability theory stating that inconsistent probabilities create profit opportunities
Empirical Probability
The probability of an event estimated as a relative frequency of occurrence
Event
Any outcome or specified set of outcomes of a random variable
Exhaustive
Covering or containing all possible outcomes
Expected Value
The probability-weighted average of the possible outcomes of a random variable
Face Value
The amount of cash payable by a company to the bond holders when the bonds mature; the promised payment at maturity separate from any coupon payment
Independent
With reference to events, the property that the occurrence of one event does not affect the probability of another event
Joint probability
The probability of the joint occurrence of stated events
Joint probability function
A function giving measure the probability of values of stated random variables
Likelihood
The probability of an observation given a particular set of conditions
Marginal probability
The probability of an event not conditioned on another event
Multiplication Rule for Probabilities
The rule that the joint probability of events A and B equals the probability of A given B times the probability of B
N Factorial
For a positive integer n, the product of the first n positive integers; 0 factorial equals 1 by definition. n factorial is written as n!
Node
Each value on a binomial tree from which successive moves or outcomes branch
Objective probabilities
Probabilities that generally do not vary from person to person; includes a priori and objective probabilities
Outcome
A possible value of a random variable
Pairs arbitrage trade
A trade in two closely related stocks involving the short sale of one and the purchase of the other market
Permutation
An ordered listing
Posterior probability
An updated probability that reflects or comes after new information
Prior probabilities
Probabilities reflecting beliefs prior to the arrival of new information
Probability
A number between 0 and 1 describing the chance that a stated event will occur
Random variable
A quantity whose future outcomes are uncertain
Scatter plot
A two-dimensional plot of pairs of observations on two data series
Spurious correlation
A correlation that misleadingly points toward associations between variables
Standard deviation
The positive square root of the variance; a measure of dispersion in same units as the original data
Subjective probability is
A probability drawing on personal or subjective judgment
Total probability rule
A rule explaining the unconditional probability of an event in terms of probabilities of the event conditional on mutually exclusive and exhaustive scenarios in
Total probability rule for expected value
A rule explaining the expected value of a random variable in terms of expected value of the random variable conditional on mutually exclusive and exhaustive scenarios
Tree diagram
A diagram with branches emanating from nodes representing either mutually exclusive chance events or mutually exclusive decisions
Unconditional probability
The probability of an event not conditioned on another event
Variance
The expected value (probability weighted average) of squared deviations from a random variables expected value
