# Applications Of Probability In Probability

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In definition, probability refers to the measure of the likelihood of an event happening. The probability for any event occurring falls between 1 percent and 100 percent thus meaning that the interpreted meaning of a probability equals the subject meaning held of the probability (Grinstead et al, 1997). However, it is worth noting that the application of probability or assigning of probability to the events in the effort to gratifying the axioms of probability follows some rules or basics (Grinstead et al, 1997).
One of the basics is the random variable that refers to the quantity with uncertain expected future values. For instance, it is of uncertainty to determine the price of the products in the near future given the changing dynamic
Here, for instance, the range of outcomes in an expected rate of return is naturally dependent on the particular investment or proposition (Grinstead et al, 1997).That explains why persons involved in the betting activities stand a high chance of losing on their money or possession as a result of the minimal chance of winning the betting.
The third critical basic concept for probability is events in that a mutually exclusive list if events will results in a possibility of one of the events taking place and not all of them. That in turn means that exhaustive events results in the incorporation of all the potential outcomes in the defined events (Grinstead et al, 1997).
It thus inferable that the definition of probability falls into two primary categories namely the probability of any event is a number between 0 and 1 and the sum of probabilities of all events equals 1, provided the events are both mutually exclusive and exhaustive (Grinstead et al,
Therefore, the calculation of subjective probability follows experience and judgment in making forecasts or modifying the probabilities indicated from a purely empirical approach (Grinstead, Snell, & Grinstead, 2006).
Thirdly, Priori Probabilities are a representation of probabilities that are objective and based on deduction and reasoning about a particular case. That explains why in one instance one may forecast say a 60 percent likelihood of an event occurring and at the same time forecast a 40 percent likelihood of a contrary event occurring (Grinstead, Snell, & Grinstead, 2006). For instance, the probability that it will rain tomorrow may raise another probability of there being no rain tomorrow.
Fourthly, the unconditional probability is the likelihood of one event occurring in that, for instance, the probability of event 1 will be an unconditional probability P (1). Practically, the belief by one that is 50% investment will yield a return of 10% in future, and then the unconditional probability of that event will be 0.5 (Grinstead, Snell, & Grinstead, 2006). Fifthly, conditional probability covers the probability of one event occurring given that another event has already taken

• ## Newsvendor Problem Case Study

The newsvendor problem is a mathematical model which is used to determine the optimal stock under uncertainty. In the following, the newsvendor context under cost minimization will be introduced. Let h be the unit holding cost respectively the unit overage cost (as we regard the pure cost context) and b the unit penalty of not serving demand (or unit backorder cost) respectively the unit underage cost. Then, the target inventory B is equal to the mean demand µ plus safety stock SS. The safety stock consists of k times the standard deviation σ.…

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• ## The Discounted Cash Flow Method

The discounted cash flow method usually uses to determine the value of the company. It is discounting the projected cash flow to the present value for infinite period of life. The forecasted free cash flows (FCF) that contain the economic benefits and major costs of the firm to develop. The terminal value is calculated at the time of liquidation and ceases the business that provides the fair value to firm at fix time period of 5 to 10 years. It was assumed that the expected rate of return was exceeding than required rate and company has enjoyed the benefit of growth.…

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• ## The Security Market And The Capital Market Line

In CAPM the relation between the security risk and return is linear. If the risk is higher the expected return will be high (Blanchard, 2014). If we talk about against the Capital Asset pricing model of its drawbacks. Its assumptions will first come in mind because they are unrealistic. Like totally risk free security which is difficult to find.…

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• ## Parsons Project Planning Case Study

Each risk is assigned a single value associated with the potential impact if the risk event occurs. This value should represent a reasonably pessimistic scenario, but not necessarily the worst case scenario. Each risk is also assigned a single probability value. The product of the impact and the probability is the value assigned to the risk. For example: A project manager estimates that the cost of a critical piece of equipment may overrun budget by \$1 million.…

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• ## Assignment 1: Financial Case Study

We adopted Jensen portfolio performance measure which was originally based on capital asset pricing model, calculates the expected one period return on any security or portfolio. The formula for calculation is: The result is -4.03%, which indicates that our portfolio is less diversified and our portfolio is underperforming compare to the return of risk free assets. 3.2.1.1 Sharpe Ratio This measure is based on capital market line, it considers the total risk of the portfolio being…

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• ## Inventory Control Case Study

The objective is to determine the optimum values of lot size and shortage period, which maximizes the expected average profit. Shah and Soni  proposed a multi-objective production inventory model with backorder for fuzzy random demand under flexibility and reliability of production process, the objective is to maximize the total expected profit incurred in each production cycle which is optimized using a multi-objective genetic algorithm (MOGA). Tripathy and Pattnaik  developed a model in a more general way to the work of Cheng , Tripathy et al. , Tripathy and Pattnaik , and assuming that demand exceeds supply, but the unit cost of production is inversely related to process reliability and directly related to the demand rate by a power function. Numerical example gives that this situation makes saving in the unit production cost than proposed by Tripathy et al.…

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• ## Treynor Portfolio Performance Measure

With this CAPM we can determine the how the security and the market related. Deviations from Treynor’s view are expected to cancel out wherever there is a fully diversified portfolio. If Treynor’s Index is high, it…

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• ## Transaction Utility And Probability Theory

They explain that the prospect theory is used to describe decisions under risk, pointing out that the price decision can be seen as a risky decision, hence the concepts of prospect theory can be used to evaluate prices. They add that with Thaler’s introduction of the theory of mental accounting, it became possible to generate different price scenarios as…

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• ## Cross Price Elasticity

Income elasticity attempts to represent the response in demand in relation to a change in income. Such elasticity is obtained by formulating, E = %Q / %I. Assuming the increase of income is 10%, we can determine the change in quantity demanded by solving, 10% x -2.0, which equals -20%. This indicates that a raise in income by 10% will decrease the quantity demanded by 20%. In such case the product analyzed is an inferior good since by definition, buyers will purchase less of this good as their income increases.…

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• ## Case Study Of Hypothetical CDS

Following, Present value of premium calculated: Discount factor * Expected value of premium * Open principal (period 1: 0.995* 122. 74*10.7M). Sum of PV of premium =1.184.875€. In addition, PV of accrued interest discounted by the same approach as PV of premium: Accrued interest amount * Discount factor* Open Principal (period 1: 0,995* 0, 11*10.7M). The accrued interest amount is assumed to be half of the fixed payment amount, holding that credit event will occur in the middle of the period (see the formula in page 28): period 1: 122.74/2*0.18.…

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