Summary FRM 1 BOOK 2 FORMULAE

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Joint Probability Calculation:
Use case:
-Calculating probability of both
events occurring 𝑗𝑜𝑖𝑛𝑡 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦. 𝑃(𝐴𝐵) = 𝑃(𝐴 𝐵) = 𝑃(𝐴|𝐵) × 𝑃(𝐵)
Accident Point
-Learn to use this formula in theory
form as question is more likely to
be in theory form.
Conditional Probability Cal-
culation:
Use case:
-calculating probability of A given 𝑃(𝐴𝐵)
𝑐𝑜𝑛𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦: 𝑃(𝐴|𝐵) =
the occurrence of B 𝑃(𝐵)
Accident Point
-Learn to use this formula in theory
form as question is more likely to
be in theory form.
Independent probability
Calculation:
Use case:
-when occurrence of A is not related
to occurrence of B
Accident Point 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑒𝑣𝑒𝑛𝑡𝑠: 𝑃(𝐴|𝐵) = 𝑃(𝐴)
-All these probabilities can be very
confusion. In conditional probability
see word “given” or any indicative
word.


Expected Value Calculation:
Expected Use:
-weighted average of possible out-
comes of a random variable 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑣𝑎𝑙𝑢𝑒: 𝐸(𝑋) = ∑𝑃(𝑋 )𝑋
Accident Point
- Understand meaning of expected

value.

Variance Calculation:
Expected Use:
-dispersion in values around the
mean 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒: 𝑉𝑎𝑟(𝑋) = 𝐸[(𝑋 − 𝜇) ]
Accident Point
You can use TI BA II Plus calculator
for this using 1 V function. It will
save time.
Covariance Calculation:
Expected Use: 𝑐𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒: 𝐶𝑜𝑣 𝑅 , 𝑅 = 𝐸 [𝑅 − 𝐸(𝑅 )] 𝑅 − 𝐸 𝑅
-provides information of how two
asset are related to each other
Accident Point