Notes of CFA Level1 READING 9:STATISTICAL CONCEPTS AND MARKET RETURNS

MODULE 9.1: CONDITIONAL AND JOINT PROBABILITIES 条件和联合概率

Exhaustive events are those that include all possible outcomes.

Mutually exclusive events are events that cannot both happen at the same time.

objective probabilities： Empirical and a priori probabilities

subjective probability ：involves the use of personal judgment

State the probability of an event in terms of odds for and against the event. 

Stating the odds that an event will or will not occur is an alternative way of expressing probabilities. Consider an event that has a probability of occurrence of 0.125, which is one-eighth. The odds that the event will occur are 0.125/（1-0.125）=1/7, which we state as, “the odds for the event occurring are one-to-seven.”

Unconditional Probability & Conditional Probability 

 A conditional probability of an occurrence is also called its likelihood. 

The total probability rule is used to determine the unconditional probability of an event, given conditional probabilities: 

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. 

MODULE 9.2: CONDITIONAL EXPECTATIONS, CORRELATION

Events A and B are independent if and only if: P(A | B) = P(A), or equivalently, P(B | A) = P(B)

Consider the effect of a tariff on steel imports on the returns of a domestic steel stock. The stock’s expected return, given that the government imposes the tariff, will be higher than the expected return if the tariff is not imposed. 

EPS abbr. Earnings Per Share 每股利润,每股收益

Covariance is a measure of how two assets move together. It is the expected value of the product of the deviations of the two random variables from their respective expected values. 

Cov(Ri,Rj) = E{[Ri − E(Ri)][Rj − E(Rj)]} ，The covariance may range from negative infinity to positive infinity.

Cov(RA,RA) = Var(RA).

 correlation coefficient（correlation）

The correlation ranges from –1 to +1. That is, –1 ≤ Corr(Ri, Rj) ≤ +1. 

If Corr(Ri, Rj) = 1.0, the random variables have perfect positive correlation. This means that a movement in one random variable results in a proportional positive movement in the other relative to its mean. 

MODULE 9.3: PORTFOLIO VARIANCE, BAYES, AND COUNTING PROBLEMS

Portfolio expected value. 

Portfolio variance. 

The variance of a portfolio composed of risky asset A and risky asset B can be expressed as: 

Var(Rp) = wAwACov(RA,RA) + wAwBCov(RA,RB) + wBwACov(RB,RA) + wBwBCov(RB,RB)

             =  wA2σ2(RA) + wB2σ2(RB) + 2wAwBCov(RA,RB) 

Since Cov(RA,RB) = σ(RB)σ(RA)ρ(RA,RB), another way to present this formula is: 

Var(RP) = wA2σ2(RA) + wB2σ2(RB) + 2wAwBσ(RA)σ(RB)ρ(RA,RB)

factorial 阶乘

Labeling

 The number of items that receives label 1 is n1 and the number that receive label 2 is n2, and so on, such that n1 + n2 + n3 + … + nk = n. The total number of ways that the labels can be assigned is:

Calculator help: On the TI, factorial is [2nd] [x!] (above the multiplication sign).

 To compute 4! on the TI, enter [4][2nd][x!] = 24.

Consider a portfolio consisting of eight stocks. Your goal is to designate four of the stocks as “longterm holds,” three of the stocks as “short-term holds,” and one stock as “sell.” How many ways can these eight stocks be labeled?

(Kaplan Notes P186)

组合公式/二项式

The general formula for labeling when k = 2 is called the combination formula (or binomial formula) and is expressed as:

排列公式  permutation formula：