Narsee Monjee Institute of Management Studies (Deemed University)

Probability Theory

Terms and Definitions

1. A set is a collection of elements.

2. The universal set is the set containing everything in a given context. We denote it by S.

3. The complement of set A is the set containing all the elements in the universal set S that are not
members of set A. We denote the complement of A by Ā.

4. A Venn diagram is a schematic drawing of sets that demonstrates the relationships between
different sets. In a Venn diagram, sets are shown as circles or other closed figures, within a
rectangle corresponding to the universal set, S.

5. The intersection of sets A and B, denoted by A∩B, is the set containing all elements that are
members of both A and B.

6. The union of A and B, denoted by AUB, is the set containing all elements that are members of
either A or B or both.

7. Two sets are said to be disjoint, when their intersection is an empty set; i.e. they have no common
elements i.e. A∩B=Φ

8. The term experiment refers to describe an act or process which can be repeated under some given
conditions and leads to one of several possible outcomes.

9. Random experiments are those experiments whose results depend on chance.

10. The results of a random experiment are called outcomes.

11. The sample space is the universal set S pertinent to a given experiment. It is the set of all possible
outcomes of an experiment.

12. If in an experiment all the possible outcomes are known in advance and none of the outcomes can
be predicted with certainty, then such an experiment is called a random experiment and the
outcomes as events or chance events. An event is a subset of the sample space S.
13. An event whose occurrence is inevitable when a certain random experiment is performed is called
a certain or sure event.

14. An event which can never occur when a certain random experiment is performed is called an
impossible event.

15. An event which may or may not occur while performing a certain random experiment is known as
a random event.

16. Two events are said to be mutually exclusive or incompatible when both cannot happen
simultaneously in a single trial or, in other words, the occurrence of any one of them precludes the
occurrence of the other. Symbolically, if A and B are mutually exclusive events, P(AB) = 0.

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 17. Two or more events are said to be independent when the outcome of one does not affect, and is
not affected by the other.

18. Events are said to be equally likely when one does not occur more often than others.

19. In simple events we consider the probability of the happening or not happening of single events.

20. In Compound Events, we consider the joint occurrence of two or more events.

21. Events are said to be exhaustive when their totality includes all the possible outcomes of a
random experiment.

22. Two events A and B are said to be complementary events if they are mutually exclusive and
exhaustive.

23. Probability is a quantitative measure of uncertainty – a number that conveys the strength of our
belief in the occurrence of an uncertain event.

24. Classical or a priori probability :

 Basic assumption is that the outcomes of a random experiment are ‘equally likely’.
 An experiment is the process of making an observation or taking a measurement.
 An event is the outcome of the experiment.
 ‘Probability’ or ‘measure of probability’ is the ratio of the number of “favorable” cases to the
total number of equally likely cases – as defined by Laplace.
 It is called a priori probability because we can state the answer in advance or a priori.

25.Relative frequency theory of probability (a posteriori or empirical probability):

 The probability of an event can be defined as the relative frequency with which it occurs in an
indefinitely large number of trials. If an event occurs ‘a’ times out of n, then its relative
frequency is a/n, the value which is approached by a/n when n becomes infinity is called the
limit of the relative frequency. Symbolically, P(A) = Lim a/n
n→∞

 Practically, P(A) = a/n.

26. Subjective probability is defined as the probability assigned by an individual based on whatever
evidence is available. Hence such probabilities are based on the beliefs of the person making the
probability statement.

27. Axiomatic approach to probability :

 In this approach no fixed definition is given, rather we give certain axioms or postulates on
which probability calculations are based.
 The whole field of probability theory for finite sample spaces is based on the following three
axioms :
i. The probability of an event ranges from 0 to 1, i.e. 0  P(A)  1.
If the event A cannot take place, its probability will be zero, i.e.
P(A) = 0 and if an event is sure to occur, or certain, its probability
will be one i.e. P(A) = 1.
ii. The probability of the entire sample space is 1 i.e. P(S) = 1.
iii. If A and B are mutually exclusive (or disjoint) events, then the probability of occurrence
of either A or B denoted by P(AUB) shall be given by P(AUB) = P(A) + P(B).

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 26. P(A) = 1 – P(Ā)

27. P(AB) = 0 for mutually exclusive events.

28. The conditional probability of event A given the occurrence of event B is

P(A/B) = P(AB) / P( B) assuming that P(B) = 0.

29. For independent events,

P(A/B) = P(A),
P(B/A) = P(B) and
P(AB) = P(A)P(B).

30. The probability of the union of several independent events –

A1, A2, A3, …..An - is given by the following equation :

P(at least one of A1, A2, A3, …..An happen) = P(A1UA2UA3 ….UAn ) =
1–P(Ā1)P(Ā2)P(Ā3)…..P(Ān)
Theorems

Addition Theorem :

For two events A and B,

P (occurrence of either A or B) = P(A or B) = P(A) + P(B) – P(AB)
Where AB is the event that both events A and B occur jointly.
For two mutually exclusive events A and B,
P (occurrence of either A or B) = P(A or B) = P(A) + P(B)

Multiplication Theorem :

For two independent events A and B,

P(occurrence of both A and B simultaneously) = P(A and B) = P(AB) = P(A)P(B)
In case events A and B are not independent,
P(occurrence of both A and B simultaneously) = P(A and B) = P(AB) = P(A)P(B/A)
= P(B)P(A/B)

Bayes Theorem

P (Ai / B) = P(Ai ) P(B/Ai )

∑ P(Ai ) P(B/Ai )

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