Quant Probability Concepts

Question 1

A priori probability

Answer 1

A probability based on logical analysis rather than on observation or personal judgement.

Question 2

Addition rule for probabilities

Answer 2

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

Question 3

Combination

Answer 3

A listing in which the order of the listed items does not matter

Question 4

Complements

Answer 4

Goods that tend to be used together; technically, two goods whose cross-pride elasticity of demand is negative.

Question 5

Conditional expected value

Answer 5

The expected value of a stated event given that another event has occurred

Question 6

Conditional Probability

Answer 6

The probability of an event given (conditioned on) another event.

Question 7

Conditional Variances

Answer 7

The variance of one variable, given the outcome of another

Question 8

Consistent

Answer 8

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

Question 9

Correlation

Answer 9

A number between -1 and +1 that measures the comovement (linear association) between two random
variables

Question 10

Covariance Matrix

Answer 10

A matrix or square array whose entries are covariances; also known as a variance-covariancd matrix

Question 11

Dependent

Answer 11

With reference to events, the property that probability of one event occurring depends on (is related to) the occurrence of another event

Question 12

Diffuse prior

Answer 12

The assumption of equal prior probabilities

Question 13

Dutch book theorem

Answer 13

A result in probability theory stating that inconsistent probabilities create profit opportunities

Question 14

Empirical Probability

Answer 14

The probability of an event estimated as a relative frequency of occurrence

Question 15

Event

Answer 15

Any outcome or specified set of outcomes of a random variable

Question 16

Exhaustive

Answer 16

Covering or containing all possible outcomes

Question 17

Expected Value

Answer 17

The probability-weighted average of the possible outcomes of a random variable

Question 18

Face Value

Answer 18

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

Question 19

Independent

Answer 19

With reference to events, the property that the occurrence of one event does not affect the probability of another event

Question 20

Joint probability

Answer 20

The probability of the joint occurrence of stated events

Question 21

Joint probability function

Answer 21

A function giving measure the probability of values of stated random variables

Question 22

Likelihood

Answer 22

The probability of an observation given a particular set of conditions

Question 23

Marginal probability

Answer 23

The probability of an event not conditioned on another event

Question 24

Multiplication Rule for Probabilities

Answer 24

The rule that the joint probability of events A and B equals the probability of A given B times the probability of B

Question 25

N Factorial

Answer 25

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!

Question 26

Node

Answer 26

Each value on a binomial tree from which successive moves or outcomes branch

Question 27

Objective probabilities

Answer 27

Probabilities that generally do not vary from person to person; includes a priori and objective probabilities

Question 28

Outcome

Answer 28

A possible value of a random variable

Question 29

Pairs arbitrage trade

Answer 29

A trade in two closely related stocks involving the short sale of one and the purchase of the other market

Question 30

Permutation

Answer 30

An ordered listing

Question 31

Posterior probability

Answer 31

An updated probability that reflects or comes after new information

Question 32

Prior probabilities

Answer 32

Probabilities reflecting beliefs prior to the arrival of new information

Question 33

Probability

Answer 33

A number between 0 and 1 describing the chance that a stated event will occur

Question 34

Random variable

Answer 34

A quantity whose future outcomes are uncertain

Question 35

Scatter plot

Answer 35

A two-dimensional plot of pairs of observations on two data series

Question 36

Spurious correlation

Answer 36

A correlation that misleadingly points toward associations between variables

Question 37

Standard deviation

Answer 37

The positive square root of the variance; a measure of dispersion in same units as the original data

Question 38

Subjective probability is

Answer 38

A probability drawing on personal or subjective judgment

Question 39

Total probability rule

Answer 39

A rule explaining the unconditional probability of an event in terms of probabilities of the event conditional on mutually exclusive and exhaustive scenarios in

Question 40

Total probability rule for expected value

Answer 40

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

Question 41

Tree diagram

Answer 41

A diagram with branches emanating from nodes representing either mutually exclusive chance events or mutually exclusive decisions

Question 42

Unconditional probability

Answer 42

The probability of an event not conditioned on another event

Question 43

Variance

Answer 43

The expected value (probability weighted average) of squared deviations from a random variables expected value