Permutation

AAA

DEFINITION of 'Permutation'

In mathematics, one of several ways of arranging or picking a set of items. The number of permutations possible for arranging a given a set of n numbers is equal to n factorial (n!). So, a set of three numbers can be arranged as: 3x2x1 = 6 permutations. Another type of permutation involves choosing a set of i items out of n choices. In this case, the number of permutations for choosing i items given n choices is given by n!/[(n-i)!]. Permutations are applicable to sets where the order matters; order does not matter in combinations.

BREAKING DOWN 'Permutation'

The study of permutations applies to finance in a broad sense because a good understanding of probability is sometimes necessary to make rational financial choices. The Allais paradox problem shows that on their own, people do not instinctually choose the higher expected financial reward. Given the choice between a sure amount of money and a small gamble with a higher expected value, most people choose the guaranteed amount due to behavioral biases. Financial professionals must be able to rationally evaluate such situations and make the correct choices on behalf of shareholders or clients.

RELATED TERMS
  1. Daniel Kahneman

    A professor emeritus of psychology and public affairs at Princeton ...
  2. Maurice Allais

    A French economist who won the 1988 Nobel Prize in Economics ...
  3. Prospect Theory

    A theory that people value gains and losses differently and, ...
  4. Expected Return

    The amount one would anticipate receiving on an investment that ...
  5. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
  6. Probability Distribution

    A statistical function that describes all the possible values ...
Related Articles
  1. Investing Basics

    What Are The Odds Of Scoring A Winning Trade?

    Just because you're on a winning streak doesn't mean you're a skilled trader. Find out why.
  2. Fundamental Analysis

    Find The Right Fit With Probability Distributions

    Discover a few of the most popular probability distributions and how to calculate them.
  3. Markets

    Get A Richer Picture With The Penman-Nissim Framework

    Probability trends and profitability analysis are clearer when using this framework.
  4. Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

    This technique can reduce uncertainty in estimating future outcomes.
  5. Forex Education

    Financial Forecasting: The Bayesian Method

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

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  7. 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.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
RELATED FAQS
  1. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  2. What are some of the more common types of regressions investors can use?

    The most common types of regression an investor can use are linear regressions and multiple linear regressions. Regressions ... Read Full Answer >>
  3. What types of assets lower portfolio variance?

    Assets that have a negative correlation with each other reduce portfolio variance. Variance is one measure of the volatility ... Read Full Answer >>
  4. When is it better to use systematic over simple random sampling?

    Under simple random sampling, a sample of items is chosen randomly from a population, and each item has an equal probability ... Read Full Answer >>
  5. What are some common financial sampling methods?

    There are two areas in finance where sampling is very important: hypothesis testing and auditing. The type of sampling methods ... Read Full Answer >>
  6. How can I measure portfolio variance?

    Portfolio variance measures the dispersion of returns of a portfolio. It is calculated using the standard deviation of each ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  5. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!