Empirical Probability

AAA

DEFINITION of 'Empirical Probability'

A form of probability that is based on some event occurring, which is calculated using collected empirical evidence. An empirical probability is closely related to the relative frequency in a given probability distribution.

INVESTOPEDIA EXPLAINS 'Empirical Probability'

In order for a theory to be proved or disproved, empirical evidence must be collected. An empirical study will be performed using actual market data. For example, many empirical studies have been conducted on the capital asset pricing model (CAPM), and the results are slightly mixed.

In some analyses, the model does hold in real world situations, but most studies have disproved the model for projecting returns. Although the model is not completely valid, that is not to say there is no utility associated with using the CAPM. For instance, the CAPM is often used to estimate a company's weighted average cost of capital.

RELATED TERMS
  1. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  2. Beta

    A measure of the volatility, or systematic risk, of a security ...
  3. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  4. A Priori Probability

    Probability calculated by logically examining existing information. ...
  5. Mutual Fund Theorem

    An investing theory, postulated by Nobel laureate James Tobin, ...
  6. Probability Distribution

    A statistical function that describes all the possible values ...
Related Articles
  1. Beta: Know The Risk
    Investing Basics

    Beta: Know The Risk

  2. Find The Right Fit With Probability ...
    Fundamental Analysis

    Find The Right Fit With Probability ...

  3. The Capital Asset Pricing Model: An ...
    Fundamental Analysis

    The Capital Asset Pricing Model: An ...

  4. An Introduction To Value at Risk (VAR)
    Options & Futures

    An Introduction To Value at Risk (VAR)

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center