Chapter Summary
A random variable represents the uncertain outcome of a random process. The probability distribution of a random variable Xpossible outcomes and assigns a probability to each. The probability distribution is analogous to the histogram of numerical data. An expected value is a weighted sum of the possible values of an expression that includes a random variable. The expected value of a random variable itself is the mean μ = E(X) of the random variable. The variance of a random variable σ2 = Var(X) is the expected value of the squared deviation from the mean. The standard deviation is the square root of the variance. The Sharpe ratio of an investment is the ratio of its net expected gain to its standard deviation.
Key Terms
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