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Session 4 Introduction To Probability
Session 4 Introduction To Probability
Session 4
Uncertainties
0 .5 1
Probability:
where:
Ei is the ith experimental outcome
and P(Ei) is its probability
Assigning Probabilities
where:
n is the number of experimental outcomes
Assigning Probabilities
Classical Method
Assigning probabilities based on the assumption
of equally likely outcomes
Subjective Method
Assigning probabilities based on judgment
Classical Method
Example: Rolling a Die
If an experiment has n possible outcomes, the
classical method would assign a probability of 1/n
to each outcome.
A Ac A B A B A B
Intersection of Events
The addition law provides a way to compute the
probability of event A, or B, or both A and B occurring.
Event
Event B1 B2 Total
A1 P(A1 and B1) P(A1 and B2) P(A1)
A2 P(A2 and B1) P(A2 and B2) P(A2)
A2 .06 .54
B1 B2 P(Ai)
A1 .11 .29 .40
B1 B2 P(Ai)
A1 .11 .29 .40
Thus, there is a 27.5% chance that that a fund will outperform the market
given that the fund is managed by GS
Marginal Probability in terms of joint probability
In particular, we would like to know whether they are independent, that is, if the
probability of one event is not affected by the occurrence of the other event.
Suppose we have our grad class of 10 students again, but make the
student sampling independent, that is “with replacement” – a student
could be picked first and picked again in the second round. Our tree and
joint probabilities now look like:
FF P(FF)=(3/10)(3/10)
)= 3/10
P( F | F
= 3 /10 P( M|F
P(F) ) = 7/10
FM P(FM)=(3/10)(7/10)
P( M = 3/ 10 MF P(MF)=(7/10)(3/10)
) F| M )
= 7/1
0 P(
P( M|M
) =7/10 MM P(MM)=(7/10)(7/10)
Probability Trees…