Page 31 - FINAL CFA SLIDES DECEMBER 2018 DAY 3

Session Unit 2:

9. Probability Concepts

LOS 9.d: Distinguish between unconditional and conditional probabilities. P.172

Unconditional p (a.k.a. marginal p) is the p of an event regardless of the past or future

occurrence of other events, e.g. p of an economic recession irrespective of changes in interest.

In A conditional probability (CP), the occurrence of one event affects the p. of the

occurrence of another event, e.g. the p of a recession if/given SARB raises repo.

P(recession | increase in interest rates); Also called likelihood

LOS 9.e: Explain the multiplication, addition, and total probability rules, p.172

The multiplication rule is for the Joint Probability (JP) of 2 events: P(AB) = P(A | B) × P(B)

The addition rule is for p that at least 1 of 2 events will occur: P(A or B) = P(A) + P(B) – P(AB)

The total probability rule is used to determine UCP of an event, given CPs: P(A) = P(A | B1)P(B1) +

P(A | B2)P(B2) + … + P(A | BN)P(BN)

…….where B1, B2,…BN is a mutually exclusive and exhaustive set of outcomes.