9.1 Random Variables

Our first random variable expresses the expectations of a day trader who is interested in stock in IBM. She can buy one share of stock in IBM for \$100 at the close of the stock market today. The stock market tomorrow determines whether she makes money. To simplify the arithmetic, we’ll restrict what can happen to three possible outcomes. The price of the stock at the close of the market tomorrow will either go up to \$105, stay at \$100, or fall to \$95. If she buys one share, she might make \$5, break even, or lose \$5. To decide if IBM is a good investment, she needs to assign probabilities to these outcomes. Together, these possible values and the corresponding probabilities define a random variable.

A random variable describes ...

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