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. After-Tax Payable Period

    The average period that a company has between receiving goods ...
  2. Price Rate Of Change - ROC

    A technical indicator that measures the percentage change between ...
  3. Compounding

    Compounding is the process in which an asset's earnings, from ...
  4. Cumulative Interest

    Cumulative interest is the sum of all interest payments made ...
  5. Reciprocal Currency Arrangement

    Temporary arrangement between central banks to maintain a supply ...
  6. Paradox of Rationality

    The irony that rational decision-making in game theory situations ...
Related Articles
  1. Investing

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  2. Investing

    Top 5 Gold Mining Stocks (ABX,NEM,AEM,GOLD,KGC)

    These five gold mining stocks have been performing well. Here's how they look on a fundamental basis.
  3. Investing

    The Effective Annual Interest Rate

    The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
  4. Retirement

    Top 10 Stocks for Retirement Portfolios (ADP, PG)

    Certain stocks are popular retirement portfolio options, but not all are as impressive as they used to be. Time to reevaluate?
  5. Investing

    The 10 Largest Holdings in the S&P 500 (AAPL,AMZN)

    What is the investing potential of each of the 10 largest companies in the S&P 500 Index?
  6. Investing

    Use this Trick to Pick the Best Restaurant Stocks

    Investors in the fast food sector should pay attenion to customer service ratings — a good barometer for a company's health.
  7. Investing

    8 Tech Companies With Acquisition Potential (ACIA)

    According to Goldman Sachs, these eight technology companies could be acquired next.
  8. Investing

    Why Rational Ignorance About Your Investments Might Really Be OK

    It's impossible to know everything about the markets. Find out how ignorance affects your investments.
  9. Investing

    The Week Ahead: June 20-24, 2016

    Investors should keep an eye on Brexit, Janet Yellen and jobless claims.
RELATED FAQS
  1. What is the difference between a president and a CEO?

    In corporate governance and structure, the roles of both CEO and president often vary across firms. Read Answer >>
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center