The Lognormal Distribution vs. the Normal Distribution
A variable X is said to have a lognormal distribution if Y = ln(X) is normally distributed, where “ln” denotes the natural logarithm. In other words, when the logarithms of values form a normal distribution, we say that the original…
Continuous Compounding
Continuous compounding applies either when the frequency with which we calculate interest is infinitely large or the time interval is infinitely small. Put quite simply, under continuous compounding, time is viewed as continuous. This differs from discrete compounding where we…
Monte Carlo Simulations
Monte Carlo simulations involve the creation of a computer-based model into which the variabilities and interrelationships between random variables are entered. A spread of results is obtained when the model is run many times – hundreds or thousands of times….
Monte Carlo Simulation vs. Historical Simulation
Monte Carlo simulation and historical simulation are both methods that can be used to determine the riskiness of a financial project. However, each method uses different assumptions and techniques to develop the probability distribution of possible outcomes.
Unconditional Vs Conditional Probabilities
Unconditional probability (also known as marginal probability) is simply the probability that an event occurs without considering any other preceding events. In other words, unconditional probabilities are not dependent on the occurrence of any other events; they are ‘stand-alone’ events….
Probability Rules
Probability rules are the concepts and facts that must be taken into account while evaluating the probabilities of various events. The CFA curriculum requires candidates to master 3 main rules of probability. These are the multiplication rule, the addition rule,…
Application of Probability Rules
Probability rules are the concepts and facts that must be taken into account while evaluating the probabilities of various events. The CFA curriculum requires candidates to master 3 main rules of probability. These are the multiplication rule, the addition rule,…
Independent vs. Dependent Events
Two or more events are independent if the occurrence of one event has no influence on the occurrence of the other event(s). Let us put this in annotations:
Unconditional Probability Using the Total Probability Rule
We can use the total probability rule to determine the unconditional probability of an event in terms of conditional probabilities on certain scenarios.
