Conditional Probability

DEFINITION of 'Conditional Probability'

Probability of an event or outcome based on the occurrence of a previous event or outcome. Conditional probability is calculated by multiplying the probability of the preceding event by the updated probability of the succeeding event.

BREAKING DOWN 'Conditional Probability'

Conditional probabilities are contingent on a previous result. For example, suppose you are drawing three marbles - red, blue and green - from a bag. Each marble has an equal chance of being drawn. What is the conditional probability of drawing the red marble after already drawing the blue one? First, the probability of drawing a blue marble is about 33% because it is one possible outcome out of three. Assuming this first event occurs, there will be two marbles remaining, with each having a 50% of being drawn. So, the chance of drawing a blue marble after already drawing a red marble would be about 16.5% (33% x 50%).

RELATED TERMS
  1. Unconditional Probability

    The probability that an event will occur, not contingent on any ...
  2. Addition Rule For Probabilities

    A statistical property that states the probability of one and/or ...
  3. Prior Probability

    The probability that an event will reflect established beliefs ...
  4. Compound Probability

    A mathematical term relating to the likeliness of two independent ...
  5. Joint Probability

    A statistical measure where the likelihood of two events occurring ...
  6. Expected Value

    Anticipated value for a given investment. In statistics and probability ...
Related Articles
  1. Professionals

    Basic Probability Concepts

    CFA Level 1 - Probability Concepts - Basics. Discusses randomness and various types of probabilities.
  2. Fundamental Analysis

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  3. Professionals

    Scenario / What-If Analysis

    We look at some ways that you can evaluate your project.
  4. Professionals

    Joint Probability

    CFA Level 1 - Probability Concepts - Joint Probability
  5. Forex Education

    Financial Forecasting: The Bayesian Method

    This method can help refine probability estimates using an intuitive process.
  6. Professionals

    Common Probability Distributions

    CFA Level 1 - Common Probability Distributions - Basics
  7. Term

    Estimating with Subjective Probability

    Subjective probability is someone’s estimation that an event will occur.
  8. Term

    What are Mutually Exclusive Events?

    In statistics, mutually exclusive situations involve the occurrence of one event that does not influence or cause another event.
  9. Options & Futures

    Multivariate Models: The Monte Carlo Analysis

    This decision-making tool integrates the idea that every decision has an impact on overall risk.
  10. Fundamental Analysis

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
RELATED FAQS
  1. What are the most common interview questions for banking / finance jobs?

    Prepare for an important interview by rehearsing with commonly asked questions for job candidates in the banking / finance ... Read Answer >>
  2. What are some examples of different taxable events?

    Learn what a taxable event is and how it affects investors and taxpayers with examples of taxable events that can result ... Read Answer >>
  3. In what ways can a portfolio be over-diversified?

    Learn how it is possible to over-diversify an investment portfolio, and find out what role opportunity cost plays in financial ... Read Answer >>
  4. How are contingent liabilities reflected on a balance sheet

    Find out how to identify, treat and report contingent liabilities on the balance sheet. See how the U.S. GAAP requires contingent ... Read Answer >>
  5. What is the difference between work in progress and work in process?

    Learn how financial institutions can use Bayesian analysis to model credit default risk, and understand how derivatives have ... Read Answer >>
  6. What are key economic growth rates that can be used to determine the economic health ...

    Discover the indicators that correlate with real economic health, and learn why many traditional metrics do not function ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center