Quantitative Methods III Flashcards Preview

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Flashcards in Quantitative Methods III Deck (16)
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1
Q

Empirical probability, a priori and subjective

A

Empirical: past observations

A priori: using formal reasoning and inspection

Subjective: personal judgment

2
Q

Odds

A

Probability / (1 - probability)

3
Q

Multiplication rule P(AB)

A

P(AB) = P(A | B) * P(B)

Prob of A&B = prob of A given B * prob of B

4
Q

Addition rule P(A or B)

A

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

Probability that at least one of the two events occur

If A & B are mutually exclusive P(AB) = 0

5
Q

Joint probability of independent events P(A and B)

A

P(A and B) = P(A) * P(B)

Think dice

6
Q

Expected value

A

Weighted average of the possible outcomes, where weights are probabilities of occurrence.

7
Q

Expected standard deviation and variance

A

Probability weighted standard deviation where Xbar = expected return.

Sum[Wi * (Xi - Xbar)^2…] / n

8
Q

Covariance

A

Sum[probability(Rx,Ry) * ((Rx - E(Rx)) * (Ry - E(Ry))]

How two assets move together

9
Q

Correlation

A

Cov(X,Y) / [stdev(x) * stdev(y)]

Measures strength of linear correlation

Has no units

10
Q

Portfolio expected return

A

E(Rp) = Sum[WiE(Ri) + … WnE(Rn)]

11
Q

Portfolio expected variance

A

Var(Rp) = Sum[Sum[WiWjCov(Ri,Rj)]]

12
Q

Bayes formula

A

P(A | B) = [P(B | A) * P(A)] / P(B)

Used to update prob given prior probs

Check out page 219 example

13
Q

Combination formula (factorial)

A

N! / [(n-r)! * r!]

R = number of items in group

N = number of total items

14
Q

Permutation formula (factorial)

A

N! / (n-r)!

How many different groups of size r in specific order can be chosen from n objects

Order matters

15
Q

How many combinations of 5 kids from a group of 15?

A

5! / [(15 - 5)! * 5!]

16
Q

How many permutations of 3 letters from the alphabet?

A

26! (26 - 3)!