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Probability Notes

The document contains detailed notes from two presentations on probability and expected value. The first presentation covers basic probability concepts, types of events, probability calculations, and practical applications, while the second focuses on random variables, probability distributions, expected value, variance, covariance, and portfolio analysis. Key formulas and examples are provided to illustrate these concepts.

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Jatin Sharma
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2 views5 pages

Probability Notes

The document contains detailed notes from two presentations on probability and expected value. The first presentation covers basic probability concepts, types of events, probability calculations, and practical applications, while the second focuses on random variables, probability distributions, expected value, variance, covariance, and portfolio analysis. Key formulas and examples are provided to illustrate these concepts.

Uploaded by

Jatin Sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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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.

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