Because financial markets are sensitive to a variety of unpredictable events, the value of a (risky) financial asset such as a stock or commodity is often interpreted as random, that is, subject to the laws of probability. Thus, while the future value of the asset cannot be predicted, measures of likelihood may be assigned to its possible values and from this one may deduce useful information. In this chapter we develop the probability theory needed to model the dynamic behavior of asset prices. The material here will require some familiarity with elementary set theory and basic combinatorics. A review of the relevant ideas may be found in Appendix A
A probability is a number between ...
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