Flashcards in Quantitative Methods III Deck (16):

1

## Empirical probability, a priori and subjective

###
Empirical: past observations

A priori: using formal reasoning and inspection

Subjective: personal judgment

2

## Odds

### Probability / (1 - probability)

3

## Multiplication rule P(AB)

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

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

4

## Addition rule P(A or B)

###
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

## Joint probability of independent events P(A and B)

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

Think dice

6

## Expected value

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

7

## Expected standard deviation and variance

###
Probability weighted standard deviation where Xbar = expected return.

Sum[Wi * (Xi - Xbar)^2...] / n

8

## Covariance

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

How two assets move together

9

## Correlation

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

Measures strength of linear correlation

Has no units

10

## Portfolio expected return

### E(Rp) = Sum[Wi*E(Ri) + ... Wn*E(Rn)]

11

## Portfolio expected variance

### Var(Rp) = Sum[Sum[Wi*Wj*Cov(Ri,Rj)]]

12

## Bayes formula

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

Used to update prob given prior probs

Check out page 219 example

13

## Combination formula (factorial)

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

R = number of items in group

N = number of total items

14

## Permutation formula (factorial)

###
N! / (n-r)!

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

Order matters

15

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

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

16