Page 37 - FINAL CFA SLIDES DECEMBER 2018 DAY 3
P. 37
Session Unit 2:
9. Probability Concepts
LOS 9.h:
Calculate and interpret an unconditional probability using the total probability rule, p177
Recall he total probability rule, p172, is for 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.
Or, In general, the unconditional probability of event R,
P(R) = P(R | S1) × P(S1) + P(R | S2) × P(S2) + . . . + P(R | SN) × P(SN), where the set of events
{S1, S2, . . . SN} is mutually exclusive and exhaustive.
The total probability rule highlights the relationship between unconditional and
conditional probabilities of mutually exclusive and exhaustive events.
It is used to explain the unconditional probability of an event in terms of probabilities
that are conditional upon other events.
