EC4024Lecture 4

| Probability & Statistics in Finance |

Today

Risk & Uncertainty

Define Probability/Statistics

Why is it used in Finance?

Examples

Mini Presentations

Risk & Uncertainty

ProbabilityIt is a measure of how plausible an event is

We measure probability using a real number between 0 and 1

(Percentage is clear?)

A probability of 0 means an event is impossible

Probability of 1 means an event is certain

The probabilities of all the events in our sample space add up to 1

Experiments

Histograms

200 400 600 800

20

40

60

80

Law of Large Numbers

Handout

Distributions

Bored?

Example: Hold’Em

Next Time

Read Cowles, 1933, in coursepackRead NotesDo Exercises