- Probability - Basic Terminology
- Two Defining Properties of Probability
- Empirical, Subjective and Priori Probability
- State the Probability of an Event as Odds
- Unconditional and Conditional Probabilities
- Multiplication, Addition and Total Probability Rules
- Joint Probability of Two Events
- Probability of Atleast One of the Events Occuring
- Dependent Vs. Independent Events in Probability
- Joint Probability of a Number of Independent Events
- Unconditional Probability Using Total Probability Rule
- Expected Value of Investments
- Calculating Variance and Standard Deviation of Stock Returns
- Conditional Expected Values
- Calculating Covariance and Correlation
- Expected Value of a Portfolio
- Variance and Standard Deviation of a Portfolio
- Bayes’ Theorem
- Multiplication Rule of Counting
- Permutation and Combination Formula
Joint Probability of Two Events
Joint probability refers to the multiplication rule of probability. This is the probability that both the events will occur.
Example
The probability that the price of oil will rise, P(B) = 0.5
The probability that the bus fare will increase if oil price rises, P(A|B) = 0.4
The probability that both oil prices and bus fares will rise, P(AB) = 0.4*0.5 = 0.2
This may look complex but the logic is actually quite straight forward. There is a 50% chance that oil price will rise and if it rises there is a 40% chance that the bus fair will also rise. So, the joint probability of both oil price rise and bus fare rise is 50% of 40%, i.e., 0.5*0.4 = 0.20 or 20%.
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