What is Empirical Probability?

Empirical probability uses the number of occurrences of an outcome within a sample set as a basis for determining the probability of that outcome. The number of times "event X" happens out of 100 trials will be the probability of event X happening. An empirical probability is closely related to the relative frequency of an event.

Understanding 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 that 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.