Calculating Harmonic Mean
Harmonic mean is calculated by dividing the number of observations (n) by the sum of reciprocals of all observations. Harmonic mean has some applications in finance. One application is to calculate the...
View ArticleCalculating Median and Mode of a Data Set
Median Median refers to the midpoint or the middle value of a data set after sorting the values in ascending or descending order. Our data set sorted in ascending order is presented below: 1.2, 1.5,...
View ArticleQuartiles, Quintiles, Deciles, and Percentiles
A quantile refers to a value at or below which a stated fraction of the data lies. Quantile is a general term, and we have different types of quantiles referring to different fractions. Quartiles...
View ArticleRange and Mean Absolute Deviation
In investment management, one of the most important things for an investor is the trade-off between the returns and risk from an investment. The return or reward is measured using the measures of...
View ArticleVariance and Standard Deviation
Risk is the possibility that actual returns might differ, or vary, from expected returns. In fact, actual returns will most likely differ from expected returns. It is important for decision-makers to...
View ArticleChebyshev’s Inequality
Chebyshev’s Inequality is used to describe the percentage of values in a distribution within an interval centered at the mean. It states that for a distribution, the percentage of observations that lie...
View ArticleCoefficient of Variation
We earlier learned about calculating the variance and standard deviation for a set of data. Standard deviation as a measure of dispersion is much easier to interpret as it uses the same unit of...
View ArticleSharpe Ratio
While deciding about what investments to make, one should weigh the rewards versus the risks of the investment opportunity. The Sharpe ratio is one popular measure of return on risk. It is named after...
View ArticleProbability – Basic Terminology
Before we learn about the probability concepts, it is important to know the basic terminology. Random Variable A random variable is one of the most important concepts in finance. A random variable is a...
View ArticleVariance and Standard Deviation of a Portfolio
We learned about how to calculate the standard deviation of a single asset. Let’s now look at how to calculate the standard deviation of a portfolio with two or more assets. The returns of the...
View ArticleBayes’ Theorem
Bayes’ Theorem formula, also known as Bayes’ Law, or Bayes’ Rule, is an intuitive idea. We adjust our perspective (the probability set) given new, relevant information. Formally, Bayes’ Theorem helps...
View ArticleMultiplication Rule of Counting
Counting problems have to do with counting the total number of outcomes or logical possibilities of something. For example, if we have to flip a coin, we can easily count the number of outcomes. There...
View ArticlePermutation and Combination Formula
Combination Formula This is a special case of multinomial formula where the types of labels k=2. This means that the n objects can be labelled only in two ways and n1 + n2 = n. For example, suppose we...
View ArticleCommon Probability Distributions
Introduces some of the discrete and continuous probability distributions most commonly used to describe the behavior of random variables. The post Common Probability Distributions appeared first on...
View ArticleWhat is a Probability Distribution
We know that a random variable is an uncertain quantity or a number. Its value is determined by chance. For example, the outcome of rolling a die is random. We could get any number from 1 to 6. In case...
View ArticleDiscrete Vs. Continuous Random Variable
Discrete Random Variable A random variable is said to be discrete if the total number of values it can take can be counted. Alternatively, we can say that a discrete random variable can take only a...
View ArticleCumulative Distribution Function
We can also construct a cumulative distribution function for a random variable. A cumulative distribution function gives the probability that the random variable X is less than or equal to x, for every...
View ArticleDiscrete Uniform Random Variable
A discrete uniform random variable is a discrete random variable for which the probability of each outcome is the same. Example The roll of a die is a discrete uniform random variable and has a...
View ArticleBernoulli and Binomial Distribution
A Bernoulli random variable is a random variable that takes a value of 1 in case of a success and a value of 0 in case of a failure. We can also say that this random variable has a Bernoulli...
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