Conditional Probability

AAA

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.

INVESTOPEDIA EXPLAINS '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. Symmetrical Distribution

    A situation in which the values of variables occur at regular ...
  2. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  3. Probability Distribution

    A statistical function that describes all the possible values ...
  4. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  5. A Priori Probability

    Probability calculated by logically examining existing information. ...
  6. Value At Risk - VaR

    A statistical technique used to measure and quantify the level ...
Related Articles
  1. Fundamental Analysis

    Find The Right Fit With Probability Distributions

    Discover a few of the most popular probability distributions and how to calculate them.
  2. Active Trading Fundamentals

    How To Convert Value At Risk To Different Time Periods

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  3. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  4. Options & Futures

    Financial Concepts

    Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear.
  5. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  6. Investing

    How to Use Stratified Random Sampling

    Stratified random sampling is a technique best used with a sample population easily broken into distinct subgroups. Samples are then taken from each subgroup based on the ratio of the subgroup’s ...
  7. Fundamental Analysis

    Lognormal and Normal Distribution

    When and why do you use lognormal distribution or normal distribution for analyzing securities? Lognormal for stocks, normal for portfolio returns.
  8. Investing Basics

    Using Normal Distribution Formula To Optimize Your Portfolio

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.
  9. Technical Indicators

    The Normal Distribution Table, Explained

    The normal distribution formula is based on two simple parameters - mean and standard deviation
  10. Economics

    Can Investors Trust Official Statistics?

    The official statistics in some countries need to be taken with a grain of salt. Find out why you should be skeptical.

You May Also Like

Hot Definitions
  1. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  2. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  3. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  4. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  6. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
Trading Center