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Pj = 0 means we are CERTAIN that the event or state will NOT happen
example of a probability
distribution:
Ptoss a die: the random variable (r.v.) is the number observed on
the face of the die: could observe a 1, 2, 3, 4, 5, 6
Pthe probability distribution of a random variable is a
representation of the probabilities for all possible outcomes for that
r.v.
P This representation might be algebraic, graphical or tabular
Pif the die is equally likely, then each side of the die has the same
chance of coming up so the P(X=x) = 1/6 for each x
Tabular representation
tabular representation of the probability distribution of the value of
the die is:
X
P(X)
1 1/6
2 1/6
3 1/6
4 1/6
5 1/6
6 1/6
SUM
Algebraic Representation
To summarize a Probability
Distribution
Measures of Central Tendency: (where is the center of the distribution)
Mean
Mode
Median
Measures of Dispersion
variance and standard deviation
Range
mean absolute deviation
E(Ri ) Ri i
P R
ij
ij
1
1
E(Ri ) Ri i Rij
M
j M
ij
i Pij Rij Ri
2
j 1
i Var [ Ri ] V [ Ri ] E [( Rij Ri ) ]
2
2
B
Asset B
RAj
PAj
RBj
PBj
4.1
1/7
5.8
1/7
2.3
1/7
2.3
1/7
1.6
1/7
1.6
1/7
-.18
1/7
-3.72
1/7
3.7
1/7
4.3
1/7
1.6
1/7
1.6
1/7
4.8
1/7
6.04
1/7
Notes
all probabilities are positive
all probabilities sum to one
all probabilities are equal in this case but this need not be true
To summarize the probability distribution for each asset and thus
to help us make a decision, we could calculate
the Expected Return on each asset and
The Variance of Return on each asset
RAj
PAj
RAj PAj
4.1
1/7
4.1 * 1/7
2.3
1/7
2.3 * 1/7
1.6
1/7
1.6 * 1/7
-.18
1/7
-.18 * 1/7
3.7
1/7
3.7 * 1/7
1.6
1/7
1.6 * 1/7
4.8
1/7
4.8 * 1/7
SUM
2.56
2.5867429
RBj
PBj
RBj PBj
5.8
1/7
5.8 * 1/7
2.3
1/7
2.3 * 1/7
1.6
1/7
1.6 * 1/7
-3.72
1/7
-3.72 * 1/7
4.3
1/7
4.3 * 1/7
1.6
1/7
1.6 * 1/7
6.04
1/7
6.04 * 1/7
SUM
2.56
9.5692571
Mean =
1
Ri
M
R
j 1
ij
1 M
2
Rij Ri
s
M 1 j 1
2
Copyright information
Slides prepared by and the property of
Marie Racine. Copyright Racine Marie,
2016