Investing in stocks and probability

In summary, the possibility of people investing in stock A first and then also investing in stock B is 0.125. This is a conditional probability, meaning that the likelihood of buying stock B is influenced by whether or not the person has already bought stock A. In general, the influence of one event on another can either increase or decrease the probability of the second event occurring.
  • #1
beanryu
92
0
the possibility of people investing in stock A is 0.40, the possibility of people investing in stock B is 0.15, and the possiblity of people investing in both stock is 0.05.

the question is what is the possibility of people investing in stock A first and will also invest in stock B.

I think the answer is 0.40*(0.05*0.40), because using a venn diagram, I can see that 0.05 is apart of the 0.40 circle. The possibility of people investing in stock A is 40% and 5% of these people, that is (0.05*0.40), will invest in another stock.

Am I right?

Thank you for your comments!
 
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  • #2
Hoping that you mean probability rather than possibility, id say i don't know the answer.
 
  • #3
This is called conditional probability. Denote the probability of event A given that event B has already occurred as P(A|B).

Then P(A|B) = P(A and B) / P(B)

So in this case P(B|A) = 0.05/0.4 = 0.125

Note that is is slightly lower than the unconditional probabilty (0.15) of buying stock B. So in this case a purchase of stock A makes it less likely that you'll purchase stock B. In general with conditional probabilty the influence of the apriori knowledge (in this case the knowlegde that the person has already bought stock A) may either increase or decrease the other probabilty.

When the probabilty of A and B is greater than what it would be if A and B where independant - that is P(A) times P(B) - then it means that the influence of one event is to increase the probabilty of the other event. Conversely when the probabilty of A and B is less than P(A) times P(B) then it means that the influence of one event is to decrease the probabilty of the other event.

Some good examples would be.

1. Let A be the probabilty that it rains on a certain day in town A and let B be the probabilty that it rains on that same day in town B. If towns A and B are widely geographically separated then A and B are independant events. If however towns A and B are near by then P(A and B) is greater then P(A) times P(B) and the conditional probabilities are greater than the unconditional probabilies.

2. Let A denote the probabilty that a randomly selected student will score in the top 10% of his year and let B denote the probabilty that the same student truants school more 20 days per term. Here you will find that P(A and B) is less than that which would be expected if the events were independant hence the conditional probabilites are less then the unconditional probabilities.
 
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  • #4
thanks alot
 

What is stock investing?

Stock investing is the process of buying and selling shares of ownership in a company, with the goal of making a profit from the increase in value of those shares over time. It involves analyzing the financial health and performance of a company, as well as market trends and economic conditions, to make informed decisions about which stocks to buy and sell.

How does probability play a role in stock investing?

Probability plays a major role in stock investing as it helps investors assess the likelihood of a stock's future performance. This can be done through analyzing historical data, market trends, and economic conditions to determine the probability of a stock's success or failure. It also helps investors manage risk by understanding the probability of potential losses.

What are the main factors that affect the probability of a stock's success?

The main factors that affect the probability of a stock's success include the company's financial health and performance, market trends, economic conditions, industry competition, and government regulations. It is important for investors to thoroughly research and understand these factors before making investment decisions.

How can an investor use probability to make informed investment decisions?

An investor can use probability to make informed investment decisions by conducting thorough research and analysis of a company's financials, market trends, and economic conditions. They can also utilize tools such as technical analysis and fundamental analysis to assess the probability of a stock's success. Additionally, diversifying investments can help manage risk by spreading it across multiple stocks with varying probabilities of success.

What are some common mistakes investors make when considering probability in stock investing?

Some common mistakes investors make when considering probability in stock investing include relying too heavily on past performance as an indicator of future success, not considering all relevant factors that may affect a stock's probability of success, and not properly diversifying their investments. It is important for investors to have a well-rounded understanding of probability and to continually monitor and adjust their investments based on new information.

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