Random Variables

Most of the variables that exist in finance can be defined by an implied future value.
This future value is calculated based on historical probability and the liklihood of different outcomes.
This can be defined as dealing with random variables
These are variables whose value is determined by the outcome of a random process.
This outcome can either be:

  • Discrete - indicating a finite number of possible values

  • Continuous - indicating an infinite number of possible values

Examples of Discrete

  • Rolling a Dice

  • Picking a Card from a Pack

Exampes of Continuous

  • Stock price in 1 years time

Although there are an infinite number of possible values past experience and historical data can help us to assess the liklihood of different values.

Population vs Sample

Population - a complete set of observations on a variable
Sample - a subset of observations on a variable

The main reason for working with a sample is obvious

  • It will cost less than trying to work with the whole population

  • You are able to make inferences about what is going on in the population

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