- CFA Exams
- Dec. 2020 Level 1
- Study Session 2. Quantitative Methods: Basic Concepts
- Reading 8. Probability Concepts

### Reading 8. Probability Concepts

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### Learning Outcome Statements

Reading 8. Probability Concepts | |
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1. Introductiona. define a random variable, an outcome, an event, mutually exclusive events, and exhaustive events;b. state the two defining properties of probability and distinguish among empirical, subjective, and a priori probabilities;
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2. Unconditional, Conditional, and Joint Probabilitiesd. distinguish between unconditional and conditional probabilities; | |

3. Addition Rule for Probabilities: the Probability that at Least One of Two Events Will Occure. explain the multiplication, addition, and total probability rules;f. calculate and interpret 1) the joint probability of two events, 2) the probability that at least one of two events will occur, given the probability of each and the joint probability of the two events, and 3) a joint probability of any number of independent events.
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4. Multiplication Rule for Independent Eventse. explain the multiplication, addition, and total probability rules;f. calculate and interpret 1) the joint probability of two events, 2) the probability that at least one of two events will occur, given the probability of each and the joint probability of the two events, and 3) a joint probability of any number of independent events.
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5. The Total Probability Ruleh. calculate and interpret an unconditional probability using the total probability rule;i. explain the use of conditional expectation in investment applications;
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6. Expected Value, Variance, and Standard Deviation of a Random Variablel. calculate and interpret the expected value, variance, and standard deviation of a random variable and of returns on a portfolio; | |

7. Covariance and Correlationk. calculate and interpret covariance and correlation; | |

8. Portfolio Expected Return and Variancem. calculate and interpret covariance given a joint probability function; | |

9. Bayes' Formulan. calculate and interpret an updated probability using Bayes' formula; | |

10. Principles of Countingo. identify the most appropriate method to solve a particular counting problem and solve counting problems using the factorial, combination, and permutation concepts. |