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Probability

Every day we make judgments based on probability. The weather forecaster announces that there is a 90% chance of a thunderstorm this evening. The gambler feels there is a 50% chance that his horse will win the race. These chances, termed probabilities, measure the likelihood of certain events occurring. In the financial world, probability is applied in measuring the risks involved in trading and investing and their effect on the rate of return.

This course outlines the fundamentals of probability, and covers the key terminology associated with probability theory. It describes the different types of probability and their calculation, and explains how probability theory facilitates investor decisions.

OBJECTIVES

On completion of this course, you will be able to:

• Define the concept of probability

• Describe and calculate different types of probability

• Assess the expected value of a random variable based on the probability of its possible outcomes, and explain how different risk preferences are combined with expected values to make investment decisions

• Recognize the effect of inflation on the present value of a future sum of money and explain how the existence of inflation can influence investment decisions

COURSE OUTLINE

Topic 1: Definition of Probability

• The Principles of Probability

• Probability

• Probability – Example

Topic 2: Types of Probibility

• Probability Types

• Relative Frequency

• Joint Probability

• Conditional Probability

• Conditional Probability – Example

• Conditional Probability Formula

• Additional Rule of Probability

• Additional Rule of Probability – Example

Topic 3: Inflation Considerations

• Inflation

Topic 4: Expected Value of a Random Variable

• Definition of Expected Value of Random Variable

• Expected Value of a Random Variable – Exmaple

• Risk Exposure

PREREQUISITE KNOWLEDGE

No prior knowledge is assumed for this course.

ESTIMATED COMPLETED TIME

60 Minutes

Next Course

Distributions & Hypothesis Testing

This course is about random variables, probability distributions, the testing of hypotheses, and confidence levels. Understanding these concepts is essential in the financial world, particularly in option pricing and risk measurement. The course covers the types of random variable and the probability distributions that each follows. It also provides information about the parameters of the distributions.

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Other Courses In:

Building Blocks

Interest Calculations

Time Value of Money

NPV & IRR

Distributions & Hypothesis Testing

Estimating Volatility

Correlation & Regression Analysis

Calculus

Indices, Exponents, Logs, & Geometric Series

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