Detailed Notes from the Presentations
Presentation 1: Probability
1. Basic Probability Concepts
Definition: Probability is the numerical measure of the likelihood that an uncertain
event will occur.
1. Probability values range from 0 to 1:
Impossible Event: Probability = 0 (event cannot occur).
Certain Event: Probability = 1 (event is guaranteed to occur).
Key Properties:
1. For any event A, 0≤P(A)≤10 \leq P(A) \leq 1.
2. The sum of probabilities of all mutually exclusive and collectively exhaustive
events equals 1.
2. Assessing Probability
Approaches to Assess Probability:
1. A Priori: Based on known theoretical principles (e.g., rolling a die).
2. Empirical Probability: Based on observed data or experiments.
3. Subjective Probability: Based on personal judgment, experience, or opinion.
3. Types of Events
Simple Event: Described by a single characteristic (e.g., a January day).
Joint Event: Described by two or more characteristics (e.g., January and
Wednesday).
Complement of an Event (A’): Includes all outcomes not in event A (e.g., days not in
January).
4. Sample Space
Definition: The set of all possible outcomes for an experiment.
o Example: Rolling a die results in the sample space – {1, 2, 3, 4, 5, 6}.
o Example: A deck of cards has 52 possible outcomes.
5. Organizing and Visualizing Events
Contingency Tables: Used to organize outcomes based on two or more variables.
Decision Trees: Visualize events and their probabilities.
6. Probability Calculations
1. Simple Probability: The probability of a single event.
o Example: P(Jan)=32365P(Jan) = \frac{32}{365}.
2. Joint Probability: The probability of two or more events occurring simultaneously.
o Example: P(Jan and Wed)=5365P(Jan \text{ and } Wed) = \frac{5}{365}.
3. Marginal Probability: The probability of a single event, ignoring others.
7. Mutually Exclusive and Collectively
Exhaustive Events
Mutually Exclusive Events: Cannot occur simultaneously (e.g., a day cannot be both
in January and February).
Collectively Exhaustive Events: Together, they cover the entire sample space (e.g.,
Weekdays and Weekends).
8. Rules of Probability
1. General Addition Rule: – P(A or B)=P(A)+P(B)−P(A and B)P(A \text{ or } B) = P(A) +
P(B) - P(A \text{ and } B).
o For mutually exclusive events, P(A and B)=0P(A \text{ and } B) = 0,
simplifying the rule to P(A or B)=P(A)+P(B)P(A \text{ or } B) = P(A) + P(B).
2. Multiplication Rule for Independent Events: – P(A and B)=P(A)×P(B)P(A \text{ and }
B) = P(A) \times P(B).
9. Practical Applications
Calculating probabilities for:
o At least one event occurring.
o Exactly one event occurring.
o Neither event occurring.
Presentation 2: Expected Value
1. Random Variables
Definition: A variable representing the outcome of a random experiment.
o Discrete Random Variables: Can take countable values (e.g., number of
heads when tossing a coin).
o Continuous Random Variables: Can take any value within a range (e.g.,
weight, salary).
Examples:
1. Rolling a die twice:
Let XX be the number of times 4 occurs. Possible values: X=0,1,2X =
0, 1, 2.
2. Tossing a coin 5 times:
Let XX be the number of heads. Possible values: X=0,1,2,3,4,5X = 0,
1, 2, 3, 4, 5.
2. Probability Distribution
Definition: A mutually exclusive listing of all possible numerical outcomes and their
associated probabilities.
Example:
o Tossing 2 coins. Let X=Number of HeadsX = \text{Number of Heads}:
X Probabilit
X y
0 0.25
1 0.50
2 0.25
3. Expected Value (Mean)
Definition: The weighted average of a random variable’s outcomes.
Formula: – E(X)=∑Xi⋅P(Xi)E(X) = \sum X_i \cdot P(X_i).
Examples:
1. Tossing 2 coins:
E(X)=(0⋅0.25)+(1⋅0.50)+(2⋅0.25)=1.0E(X) = (0 \cdot 0.25) + (1 \cdot
0.50) + (2 \cdot 0.25) = 1.0.
2. Rolling a die:
X=Face ValueX = \text{Face Value}.
E(X)=16⋅(1+2+3+4+5+6)=3.5E(X) = \frac{1}{6} \cdot (1 + 2 + 3 + 4 + 5
+ 6) = 3.5.
4. Variance and Standard Deviation
Variance Formula: – σ2=∑P(Xi)⋅[Xi−E(X)]2\sigma^2 = \sum P(X_i) \cdot [X_i - E(X)]^2.
Standard Deviation: – σ=σ2\sigma = \sqrt{\sigma^2}.
Examples:
1. Tossing 2 coins:
Possible outcomes: 0,1,20, 1, 2.
Variance: σ2=(0−1)2⋅0.25+(1−1)2⋅0.50+(2−1)2⋅0.25=0.5\sigma^2 =
(0 - 1)^2 \cdot 0.25 + (1 - 1)^2 \cdot 0.50 + (2 - 1)^2 \cdot 0.25 = 0.5.
Standard Deviation: σ=0.5=0.707\sigma = \sqrt{0.5} = 0.707.
2. Rolling a die:
Variance and standard deviation calculated similarly.
5. Covariance
Definition: Measures the strength and direction of the linear relationship between
two random variables.
o Positive Covariance: Indicates a positive relationship.
o Negative Covariance: Indicates a negative relationship.
Formula: – Cov(X,Y)=∑P(Xi,Yi)⋅[Xi−E(X)]⋅[Yi−E(Y)]\text{Cov}(X, Y) = \sum P(X_i, Y_i) \
cdot [X_i - E(X)] \cdot [Y_i - E(Y)].
6. Portfolio Analysis
Expected Portfolio Return: Weighted average return of multiple investments.
Portfolio Risk: Variance and standard deviation of returns for a combination of
investments.
Examples:
1. Investments X and Y:
μX=50,σX=43.30\mu_X = 50, \sigma_X = 43.30.
μY=95,σY=193.21\mu_Y = 95, \sigma_Y = 193.21.
Covariance: σXY=8250\sigma_{XY} = 8250.
2. Portfolio weights:
40% in X, 60% in Y.
Portfolio Return: E(P)=0.4⋅50+0.6⋅95=77E(P) = 0.4 \cdot 50 + 0.6 \
cdot 95 = 77.
Portfolio Risk: Calculated using the formula for weighted variance.
