Statistics& Financial Modelling Flashcards
Quantitative Finance
Random Experiment
Random Experiment – a process leading to an uncertain outcome
Basic Outcome
Basic Outcome – a possible outcome of a random experiment
Sample Space (S)
Sample Space (S) – the collection of all possible outcomes of a random experiment
Event (E)
Event (E) – any subset of basic outcomes from the sample space
Intersection of Events
Intersection of Events – If A and B are two events in a sample space S, then the intersection, A ∩ B, is the set of all outcomes in S that belong to both A and B

Mutually Exclusive Events互斥
A and B are Mutually Exclusive Events if they have no basic outcomes in common
i.e., the set A ∩ B is empty

Union of Events
Union of Events – If A and B are two events in a sample space S, then the union, A U B, is the set of all outcomes in S that belong to either A or B

Collectively Exhaustive
Events E1, E2, …,Ek are Collectively Exhaustive events if E1 U E2 U . . . U Ek = S
- i.e., the events completely cover the sample space
Complement
The Complement of an event A is the set of all basic outcomes in the sample space that do not belong to A. The complement is denoted A

Let the Sample Space be the collection of all possible outcomes of rolling one die: S = [1, 2, 3, 4, 5, 6]
Let A be the event “Number rolled is even”
Let B be the event “Number rolled is at least 4”
Then
A = [2, 4, 6] and B = [4, 5, 6]
Q: Complements、Intersections、Unions、Mutually exclusive、Collectively exhaustive?
Mutually exclusive:
- A and B are not mutually exclusive
- The outcomes 4 and 6 are common to both
Collectively exhaustive:
- A and B are not collectively exhaustive
- AUB doesnotcontain1or3

Probability
Probability – the chance that an uncertain event will occur (always between 0 and 1)
0 ≤ P(A) ≤ 1 For any event A

Assessing Probability Methods
There are three approaches to assessing the probability of an uncertain event:
- classical probability
- relative frequency probability
- subjective probability
Classical Probability Method
Assumes all outcomes in the sample space are equally likely to occur
Classical probability of event A:

Permutations
Permutations: the number of possible arrangements when x objects are to be selected from a total of n objects and arranged in order [with (n – x) objects left over]

Conditional probability
A conditional probability is the probability of one event, given that another event has occurred:

Statistical Independence
- Two events are statistically independent if and only if: P(A∩ B)= P(A)P(B)
Events A and B are independent when the probability of one event is not affected by the other event
- If A and B are independent, then
P(A|B)= P(A),if P(B)>0
P(B|A)= P(B),if P(A)>0
Joint and Marginal Probabilities

Odds
- The odds in favor of a particular event are given by the ratio of the probability of the event divided by the probability of its complement
- The odds in favor of A are: below

Bayes’ Theorem
对于贝叶斯公式,记住AB AB AB,然后再做分组:”AB = A×BA/B”。
贝叶斯定理虽然只是一个概率计算公式,但其最著名的一个用途便是“假阳性”和“假阴性”检测。

Overinvolvement Ratio

Using a Tree Diagram

Random Variable
Represents a possible numerical value from a random experiment

Discrete Random Variable
Takes on no more than a countable number of values

Continuous Random Variable
- Can take on any value in an interval
- Possible values are measured on a continuum







































































































































































