Page 4 - FINAL CFA I SLIDES JUNE 2019 DAY 3
P. 4
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.
