Unconditional and Conditional Probabilities
Let’s say you are asked the following question:
What is the probability of your portfolio earning a return greater than 10%?
This kind of probability is an unconditional probability as the probability is not dependent on the occurrence of any other event. The event, A, is that the portfolio will earn a return greater than 10%. The probability of such an event will be specified as P(A). The calculation is quite simple. The numerator is the sum of probabilities of all returns being above 10%. Assume this is 0.60. The denominator is 1, the sum of probabilities of all possible returns. The probability P(A) = 0.60/1 = 0.60.
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