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.

INVESTOPEDIA EXPLAINS '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. Probability Distribution

    A statistical function that describes all the possible values ...
  4. Expected Return

    The amount one would anticipate receiving on an investment that ...
  5. Prospect Theory

    A theory that people value gains and losses differently and, ...
  6. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
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 produce negative portfolio variance?

    Assets that have a negative correlation with each other produce negative portfolio variance. Variance is one measure of the ... 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 >>
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. Economics

    Explaining the Liquidity Coverage Ratio

    The liquidity coverage ratio requires banks and other financial institutions to hold enough cash and liquid assets on hand to weather market stress.
  8. Fundamental Analysis

    Calculating Valuation

    Valuation is the process of determining what an asset is worth.
  9. Economics

    Will the Selloff in China Hurt the Global Economy?

    Though China is the world’s second largest economy, its volatility in the stock market is unlikely to have an impact on the global or Chinese economy.
  10. Fundamental Analysis

    Understanding Qualitative Analysis

    Qualitative analysis is a general term describing the non-mathematical scrutiny used by investors and managers to make investment and business decisions.

You May Also Like

Hot Definitions
  1. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  2. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  3. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  4. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  5. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  6. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
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!