9 A Probability Dist. Cont V. Discreet Random Variable + Prob Functions

Question 0

Define a discreet random variable and it’s probability function (basic type of random variable)

Answer 0

A discreet random variable at most can take on a countable number of possible outcomes

X has a limit, Y doesn’t

Ex: quoted stock price (historical)

Question 1

Define a probability distribution

Answer 1

A probability distribution specifies the probabilities of the possible outcomes of a variable

Only an approximation of the relative frequency of a random variables possible outcomes

Question 2

Define a continuous random variable and it’s probability function

Answer 2

Ex: a rate of return (Z1+Z2)/2 (this outcome is ALWAYS possible) is a continuous random variable because we cannot describe the possible outcomes of a continuous variable Z

Ex: quoted stock price as continuous random variable (log normal random in forecast)

Question 3

4 probability distributions and investment uses

Answer 3

Uniform, binomial, normal, lognormal

Black scholes(options)

Binomial(options)

Calm

Question 4

Define a random variable and principles

Answer 4

A random variable is a quantity whose future outcomes are uncertain

Principle: always describe and understand it’s possible outcomes