Page 29 - FINAL CFA SLIDES DECEMBER 2018 DAY 3

Session Unit 2:
9. Probability Concepts

LOS 9.b: State the two defining properties of probability and distinguish among empirical,

subjective, and a priori probabilities, p.170

There are 2 defining properties of probability, p.170

1. 0 ≤ P(Ei) ≤ 1).

2. If a set of events, E1, E2, … En, is mutually exclusive & exhaustive, ΣP(Ei) = 1).

Distinguish 3 types of probability: Emperical, Priori and Subjective! P.171

• An empirical probability is developed from past data e.g. based on theft cases in the

past, we derive likelihood!;

• a priori probability is determined using a formal reasoning and inspection process
e.g., if R = I and I = C, it is likely R = C!

• A subjective probability is the least formal, involves personal judgment e.g. “I believe

there is a 70% probability that ABSA will outperform the market this year.”

Empirical and a priori probabilities, by contrast, are objective probabilities.