Sunday, November 2

Unconditional probabilities vs. Conditional probability

Unconditional probabilities
An independent chance that a single outcome results from a sample of possible outcomes, without reference to any other event.

P(A) = no of time of “A” occur / total no of possible outcomes

Conditional probability (or Mariginal probability)
Probability of an event or outcome is based on the occurrence of a previous event or outcome. Conditional probabilities are important in tests of market efficiency, where event B is some piece of public or private information that becomes available to the market at some point of time.

Probability of A if B occurred,

P(A│B) = Joint probability of A and B / Unconditional probability of B
= P(AB) / P(B),

where: P(B) is not equal to 0

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