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JP MORGAN
GLOBAL MARKETS and

INVESTOR SERVICES
TRAINING PROGRAM
PROBABILITY AND STATISTICS
BOOT CAMP SESSION
Aaron Tenenbein
Professor of Statistics
Director of the Actuarial Science Program
Stern School of Business
New York University
June 18, 2018
Copyright © 2017 by Edward L. Melnick and Aaron Tenenbein. All rights reserved. No part of this work may be reproduced or used in 1
any form without the written permission of the authors.
TABLE OF CONTENTS
TABLE OF CONTENTS ........................................................................................ 2
OBJECTIVES OF THE BOOT CAMP SESSION ..................................................... 3
OUTLINE OF TOPICS ......................................................................................... 4
NOTES ON PROBABILITY, PROBABILITY DISTRIBUTIONS,

AND THE NORMAL DISTRIBUTION.................................................................. 5
I. BASIC CONCEPTS OF PROBABILITY ....................................................................6
II. PROBABILITY DISTRIBUTIONS ..........................................................................8
III.THE NORMAL PROBABILITY DISTRIBUTION ..................................................... 15
IV. NON NORMAL PROBABILITY DISTRIBUTIONS ................................................. 26
CASES .............................................................................................................. 29
EXPECTED VALUES AND OPTIONS........................................................................ 30
DISTRIBUTION OF EQUITY AND INCOME RETURNS: DISCRETE CASE .................... 31
DISTRIBUTION OF EQUITY AND INCOME RETURNS: CONTINUOUS CASE .............. 32
DISTRIBUTION OF SERVICE TIMES ...................................................................... 33
NORMAL CURVE AREAS .................................................................................. 34

EXAMPLES OF THE USE OF THE NORMAL CURVE AREA TABLES ............................. 35
SOLUTIONS TO CASES .................................................................................... 40
OBJECTIVES OF THE BOOT CAMP SESSION
The purpose of this boot camp session is to provide an introduction

to the elements of probability that will be used in the Probability and
Statistics Course in the Global Markets Training Program. This session will
stress applications of probability to finance.
The course will be taught in a lecture and discussion mode. Student

participation will be encouraged. Problems which stress the financial
applications of probability will be assigned to the participants. Detailed
solutions will be provided.
The HP 17BII calculator will be used as an aid for carrying out

probability calculations. The course is designed to be interactive. The
students should bring their calculators to class in order to participate in the
computations.
OUTLINE OF TOPICS
Morning Session:
• Basic Concepts of Probability.

• Discrete Probability Distributions.
• Computations of Probabilities from the Probability Distribution.
• Expected Value or Mean of a Discrete Probability Distribution.
• Variance and Standard Deviation of a Discrete Probability Distribution
• Empirical Rules for Probability Distributions.
• Estimation of Means and Standard Deviations from Data.
• Applications to Option Pricing and Probability Distributions of Rates of
Return for Financial Instruments.
Afternoon Session:
• Continuous Probability Distributions.

• The Normal Distribution and Assumptions.
• Computation of Normal Probabilities and Percentiles.
• Applications to Rate of Returns on Mutual Funds.
• Failure of the Normal Distribution Assumptions.
• Examples of Non-normal Probability Distributions.
NOTES ON PROBABILITY,
PROBABILITY DISTRIBUTIONS,
AND THE NORMAL DISTRIBUTION
PROBABILITY AND PROBABILITY DISTRIBUTIONS
I. Basic Concepts of Probability
1. NOTATION:
We let A be an event which may occur as a result of some

random experiment. We define the probability that the
event A will occur as P(A).
2. Objective or Frequentist Definition of Probability:
Suppose an experiment is repeated n independent times and A

occurs m times. The relative frequency of A is the ratio
m/n. The probability that A will occur is the long run relative
frequency of A. In other words:
P(A) = limit of the relative frequency of A as n

approaches infinity.
EXAMPLE 1
A Book Store sells copies of a given title for which the number
of copies sold appears to be stable over time. This implies that
historical data is indicative of future sales and daily sales are
independent of each other. Suppose A is the event that ten copies will
be sold tomorrow. If P(A) = 0.20, then the probability of selling ten
copies tomorrow is 0.20 or 20%. If you were to take a look at a large
number of days into the future , you would expect to sell ten copies on
20% of those days (for example, you would expect that you would sell
ten copies on 200 of the next 1,000 days or 2,000 on the next 10,000
days).
NOTE: The relative frequency of past sales is generally used as an

estimate of the probability. For example, it may be observed that on
the past 100 days, it was observed that 15 copies were sold on 28 of
those days. If we let B be the event that 15 copies will be sold
tomorrow then our estimate of P(B) = 28/100 or 28%.
3. Subjective Probability
Not all situations can be put into the framework of an objective

probability definition.
EXAMPLE 2
A financial analyst is looking at daily data on the closing prices of IBM.

He wants to estimate the probability that IBM will be selling at a price
higher than $150. If the event I is that IBM’s stock price will be higher
than $150 one year from now then what do we mean by P(I), This is a
one time occurrence and historical data may not be relevant as it was
in the book store example. In this case P(I) will depend upon the
degree of belief of the analyst and thus becomes subjective. Different
analysts will have different values for P(I). Analyst I may believe that
P(I) =0.30, whereas Analyst II may believe that P(I) = 0.65. Analyst I
may recommend a sell whereas Analyst II may recommend a buy for
IBM.
At any rate subjective probabilities and objective probabilities follow the

same mathematical laws and this series of laws make up the theory of
probability. Hence the applications of probability as a guide to make
decisions in an unknown business environment will follow the same
methods irrespective of whether the probabilities are subjective or
objective.
II. Probability Distributions
If X is a variable, then the probability function of X is
f(x) = P[ X = x]
The mean or Expected Value of X is
E(X) = µ= ∑ xf(x)
all x
The variance of x is
∑ ( x − µ) f ( x)
2
=
σ2
all x
The standard deviation of X is
∑ ( x − µ) f ( x)
2
=σ =
var iance
all x
EXAMPLE 3
Let B = the number of copies of a given stable title sold on a

randomly selected day.
f(x) = P[B = x] for x = 5, 6, 7, 8, 9, 10, 11, 12
x f(x) x f(x) (x-8)2 f(x)

5 0.10 0.50 0.90
6 0.10 0.60 0.40
7 0.20 1.40 0.20
8 0.30 2.40 0.00
9 0.10 0.90 0.10
10 0.05 0.50 0.20
11 0.10 1.10 0.90
12 0.05 0.60 0.80
1.00 8.00 3.50
Then
a. Probability of selling 7 books on a randomly selected day equals:

f(7) = 0.20, or 20%.
b. Probability of selling at least 7 books on a randomly selected day

is:
P( B≥ 7) = f(7) + f(8) + f(9) + f(10) + f(11) + f(12)

= 1 – f(5) – f(6) =
= 0.80 or 80%
c. Mean number of books sold per day
=µ x f (x)
∑= 8.00
all x
d. Variance of the number of books sold per day
σ
= 2
∑ (x − 8)
all x
2
= 3.50
f(x)
e. Standard deviation of the number of books sold per day
=σ =
3.50 1.87
f. Probability that the number of books sold on a randomly selected

day will fall within one standard deviation of the mean
is:
P( 8.00 – 1.87≤ B ≤ 8.00 + 1.87) =

P( 6.13 ≤ B ≤ 9.87 ) =
P( 7 ≤ B ≤ 9 ) = f(7) + f(8) + f(9)
= 0.20 + 0.30 + 0.10
= 0.60 or 60%
g. Probability that the number of books sold on a randomly selected

day will fall within two standard deviations of the mean
is:
P( 8.00 – 2x1.87≤ B ≤ 8.00 + 2x1.87) =

P( 4.26 ≤ B ≤ 11.74 ) = P( 5 ≤ B ≤ 11 ) =
f(5) + f(6) +f(7) + f(8) + f(9) + f(10) + f(11) = 1 – f(12)
= 0.95 or 95%.
HISTOGRAM OF THE PROBABILITY DISTRIBUTION OF B
30
25
20
PROBABILITY
15
10
0
5 6 7 8 9 10 11 12
B
NOTE:
Empirical Rules say that for distributions not subject to a high

incidence of outliers (either very large or very small values relative
to the mean), the following trends hold approximately:
1. The probability that the measurements fall within one standard

deviation of the mean is approximately 68%.
2. The probability that the measurements fall within two standard

deviations of the mean is approximately 95%.
These rules hold exactly for a normal distribution, which will be

discussed later.
This trend seems to hold true for the distribution of B in the example
above. However, consider the following example of a probability
distribution where this does not hold:
EXAMPLE 4
x f(x) x f(x) (x-8)2 f(x)

5 0.20 1.00 1.80
6 0.30 1.80 1.20
7 0.20 1.40 0.20
8 0.10 0.80 0.00
9 0.10 0.90 0.10
10 0.05 0.50 0.20
11 0.04 0.44 0.36
116 0.01 1.16 116.64
1.00 8.00 120.5
=
Mean = µ ∑ = x f (x) 8.00
allx
Variance = σ
= 2
∑
allx
(x − 8)2 f(x)
= 120.50
=
Standard deviation = σ 1=
20.50 10.98
Probability that the values fall within one standard deviation of

the mean =
P( 8.00 – 10.98 ≤ B ≤ 8.00 + 10.98) =
P(-2.98 ≤ B ≤ 18.98 ) =
P( 5 ≤ B ≤ 11 ) = 1 – 0.01 = 0.99 or 99%.
Probability that the values fall within two standard deviations of

the mean =
P( 8.00 – 21.96 ≤ B ≤ 8.00 + 21.96) =
P(-13.96 ≤ B ≤ 29.96 ) =
P( 5 ≤ B ≤ 11 ) = 1 – 0.01 = 0.99 or 99%.
Because of the very large outlier of 116, the empirical rules do not
hold.
NOTE:
The means and standard deviations are generally estimated from

sample data. When data are presented in the form:
x1, x2, x3…xn
Then the estimated mean is x and the estimated standard deviation is

S, where:
n
1
x= ∑ xi
n i=1
( )
n 2
1
n-1 ∑
S= x i -x
i=1
These sample statistics estimate the values of µ and σ . The values

of µ and σ are considered to be the population parameters and the
values of x and S are considered to be the sample estimates
(sometimes known as the statistics). The formulae for µ =∑ x f ( x )
allx
∑ ( x − µ) f ( x)
2
and
= σ are known as the weighted mean and the
all x
weighted standard deviation respectively (the weights are the

probabilities) and the formulae for x and S are known as the
unweighted estimates.
EXAMPLE 5
Let B = the number of copies of a given stable title sold on a

randomly selected day.
f(x) = P[B = x] for x = 5, 6, 7, 8, 9, 10, 11, 12
Let Q = the daily profit resulting from selling copies of this stable
title. The revenue per copy is $50. The cost consists of a fixed
cost of $10 and a variable cost of $20 per copy. The profit Q is
then:
Q = 30x – 10.
Suppose we wish to find the probability distribution of the daily

profit Q and the expected or mean daily profit E(Q).
x f(x) Q Q f(x)
5 0.10 140 14.0
6 0.10 170 17.0
7 0.20 200 40.0
8 0.30 230 69.0
9 0.10 260 26.0
10 0.05 290 14.5
11 0.10 320 32.0
12 0.05 350 17.5
1.00 230.0
The probability distribution of Q is given in columns 2 and 3 of

the above table. The mean or expected profit is:
E(Q)=∑ Qf ( x )= $230.00
allx
III. The Normal Probability Distribution
A normal distribution has a bell shaped symmetric shape that looks like
the following:
= =
µ-t µ µ+t
Properties
1. The normal distribution is symmetric about its mean. That implies

that
f (µ + t) = f(µ – t) for all t.
2. Mean = Median
3. The mean = µ and standard deviation = σ completely specify the

normal distribution.
4. If X has a normal distribution with mean = µ, then
x −µ
z=
σ
has a standard normal distribution with mean 0 and standard

deviation 1. Note that:
x =µ + zσ
Normal Distribution Probabilities can be computed using standard normal
distribution tables.
EXAMPLE 6
Suppose a mutual fund’s annual return (X) is normally distributed

with mean equal to 10% and standard deviation equal to 5%. What
is the probability that the return will fall within one standard
deviation of the mean?
 5 − 10 15 − 10 
P[5 ≤ X ≤ 15] = P  ≤Z≤ = P[ −1≤ Z ≤ 1]
 5 5 
P[5 ≤ X ≤=15] 0.3413 + 0.3413
= 0.6826 or 68%
See graphs on the next page:
Distribution Plot
Normal, Mean=0, StDev=1
0.6826
0.4
0.3
Density
0.2
0.1
0.0
-1 0 1
Z
Distribution Plot
0.09
0.6826
0.08
0.07
0.06
Density
0.05
0.04
0.03
0.02
0.01
0.00
5 10 15
X
EXAMPLE 7
Suppose a mutual fund’s annual return (X) is normally distributed with

mean equal to 10% and standard deviation equal to 5%. What is the
probability that the return will fall within two standard deviations of the
mean?
 0 − 10 20 − 10 
P[0 ≤ X ≤ 20] = P  ≤Z≤ = P[ −2 ≤ Z ≤ 2]
 5 5 
P[0 ≤ X ≤ =
20] 0.4772 + 0.4772
= 0.9544 or 95%
Distribution Plot
0.9544
0.4
0.3
Density
0.2
0.1
0.0
-2 0 2
Z
Distribution Plot
0.09
0.9544
0.08
0.07
0.06
Density
0.05
0.04
0.03
0.02
0.01
0.00
0 10 20
X
EXAMPLE 8

mean equal to 10% and standard deviation equal to 5%. Then the
probability that the rate of return will exceed 5% is:
 5 − 10 
P[X > 5]= P  Z >
 5 
= P [ Z > −1]
From standard normal distribution tables
P[X > 5] = P[Z > -1] = 0.5000 + 0.3413 = 0.8413
Distribution Plot
0.4
0.3
0.8413
Density
0.2
0.1
0.0
-1 0
Z
Distribution Plot
0.09
0.08
0.07
0.06
Density
0.05 0.8413
0.04
0.03
0.02
0.01
0.00
5 10
X
EXAMPLE 9

80th percentile of the rate of return distribution?
The 80-th percentile can be calculated as follows:
From standard normal probability distribution tables, Z = P80 = 0.84
Then for the mutual fund annual return the 80th percentile is:
X = P80 = 10 + (5 x 0.84) = 14.2%.
This implies that P(X ≤ 14.2) = 0.80 or that there is an 80% probability
that the fund will have an annual rate of return which is less than or equal
to 14.2%.
See the graphs on the next page.
Distribution Plot
0.4
0.3
Density
0.8
0.2
0.1
0.0
0 0.84
Z
Distribution Plot
0.09
0.08
0.07
0.06
Density
0.05
0.8
0.04
0.03
0.02
0.01
0.00
10 14.2
X
EXAMPLE 10

10th percentile of the rate of return distribution?
The 10-th percentile can be calculated as follows:
From standard normal probability distribution tables, Z = P10 = -1.28
Then for the mutual fund annual return the 10th percentile is:
X = P10 = 10 + [5 x(-1.28)] = 3.6%.
This implies that P(X ≤ 3.6) = 0.10 or that there is an 10% probability that
the fund will have an annual rate of return which is less than or equal to
3.6%.
See the graphs on the next page.
Distribution Plot
0.4
0.3
Density
0.2
0.1
0.1
0.0
-1.28 0
Z
Distribution Plot
0.09
0.08
0.07
0.06
Density
0.05
0.04
0.03
0.02
0.01 0.1
0.00
3.6 10
X
IV. Non Normal Probability Distributions
• The normal distribution is not a valid assumption for all

variables observed in a financial environment.
• One reason may be a lack of symmetry where there are large

values which are not balanced by smaller values (positively
skewed) or there are small values which are not balanced by
larger values (negatively skewed).
• Another reason may be that there are a large number of

outliers on either or both extremes of the variables (sometimes
measured by a parameter called Kurtosis).
• Other Distributions that have been used include the Lognormal

distribution (for example the Black Scholes Option Pricing
formula).
• A reasonable test for normality (though not complete) is to

compare the relative frequencies with the values obtained
under the empirical rules:
1. Approximately 68% of the values should fall within one

standard deviation of the mean.
2. Approximately 95% of the values should fall within two

standard deviations of the mean.
3. Approximately 99.74% of the values should fall within three

standard deviations of the mean.
4. Approximately 0.26% of the values should fall beyond

three standard deviations of the mean.
• Another test for normality is to calculate the coefficients of

skewness and kurtosis, which are available in most statistical
software packages. For a normal distribution, both coefficients
should be close to zero and statistical tests of hypothesis can
be carried out to test the assumption of normality in sample
data.
EXAMPLE 11
INFORMATION ON ANNUAL RATE OF

RETURN ON THE STANDARD AND POORS INDEX
(1950-2011)
Mean = 8.74%
Median = 9.44%
Standard Deviation = 16.89%
Minimum (2008-2009) = -35.61%
Maximum (1954-1955) = 47.29%
% within 1SD of the mean = 62% (Normal is 68%)
% within 3SD of the mean = 100% (Normal is 99.74%)
% beyond 3SD of the mean = 0% (Normal is 0.26%)
Coefficient of Skewness = - 0.30 (Normal Value =0)
Coefficient of Kurtosis = - 0.10 (Normal Value = 0)
Histogram of Annual Rate of Return on S&P 500 (1950-2011)

16 Mean 8.736
StDev 16.89
14 N 61
12
10
Frequency
0
-40 -20 0 20 40
Rate of Return
This is a case where the normal distribution appears to be a valid

assumption.
EXAMPLE 12
INFORMATION ON DAILY RATE OF

RETURN ON THE STANDARD AND POORS INDEX
(1950-2011)
Mean = 0.033%
Median = 0.046%
Standard Deviation = 0.968%
Minimum (10/16/1987) = -20.47%
Maximum (10/10/2008) = 11.58%
% within 3SD of the mean = 98.6% (Normal is 99.74%)
% beyond 3SD of the mean = 1.4% (Normal is 0.26%)
Coefficient of Skewness = -0.66 (Normal Value =0)
Coefficient of Kurtosis = 22.30 (Normal Value =0)
Histogram of Daily Rate of Return on S&P 500 (1950-2011)

5000 Mean 0.03296
StDev 0.9682
N 15349
4000
3000
Frequency
2000
1000
0
-18.0 -13.5 -9.0 -4.5 0.0 4.5 9.0
Rate of Return
This is a case where the normal distribution is not valid. The curve is fairly
symmetrical, but there is a lot of Kurtosis, because of the high percentage
of outliers. 1.4% of the daily returns are more than 3 standard deviations
away from the mean which is more than 5 times as many that would be
expected to appear in a normal distribution.
CASES
EXPECTED VALUES AND OPTIONS
A stock has a current selling price of $20. The distribution of the price of the
stock one year from now is believed to be as follows:
PRICE (x) PROBABILITY [f(x)]

20 0.05
21 0.06
22 0.07
23 0.08
24 0.09
25 0.12
26 0.15
27 0.13
28 0.10
29 0.10
30 0.05
1.00
An investor holds a one year option (European) on this stock. This enables him to
purchase, one year from now, one share of stock at $25 per share. The value of
his option will depend upon the price of the stock one year from now. If the price
rises to $28, the value of the option (ignoring interest and commissions) is $3. If
the price rises to only $23, the option is worthless.
1. Show that µ = 25.41 and σ = 2.74 , by calculation.

2. What is the probability that the stock price one year from now will
fall within:
a. one standard deviation of the mean?
b. two standard deviations of the mean?
3. Derive the distribution of the option value, ignoring interest and
commissions.
4. What is the probability that the option will have positive value?
5. Compute the mean and standard deviation of the value of the option.
DISTRIBUTION OF EQUITY AND INCOME RETURNS
DISCRETE CASE
An equity fund has an annual rate of return equal to X% and an income fund has
an annual rate of return equal to Y%. The probability distributions of X and Y are
given below:
x f(x) y g(y)
-5 0.10 3 0.10
0 0.20 4 0.20
5 0.25 5 0.25
10 0.20 6 0.20
15 0.10 7 0.10
20 0.10 8 0.10
25 0.05 9 0.05
1. Compute the mean and standard deviation for X and Y.

2. What is the probability that the equity fund rate of return falls within
one standard deviation of the mean?
3. What is the probability that the equity fund rate of return falls within
two standard deviations of the mean?
4. What is the probability that the income fund rate of return falls within
one standard deviation of the mean?
5. What is the probability that the income fund rate of return falls within
two standard deviations of the mean?
6. Which fund has a greater probability of realizing at least a 2.5% rate
of return? Explain why.
CONTINUOUS CASE
The annual rate of return on an equity fund is normally distributed with

mean 12% and standard deviation 6%. The annual rate of return on an
income fund is normally distributed with mean 10% and standard deviation
2%.
1. What is the probability that the rate of return of the equity fund
will exceed 15%?
2. What is the probability that the equity fund will lose money (the
annual rate of return will be less than 0)?
3. Find the 90th percentile of the equity fund's rate of return.
4. The manager of the equity fund will receive an annual fixed

salary of $70,000. He will receive a bonus of $50,000 if the fund
will have a rate of return higher than 12%. The manager will
receive an additional bonus of $100,000 if the fund will have a
rate of return higher than 15%. What is his expected total
annual salary?
NOTE: TOTAL SALARY = FIXED SALARY + BONUS
5. What is the probability that the rate of return on the income fund
will be more than 8%?
6. What is the probability that the rate of return on the equity fund
will be more than 8%?
7. Explain why the answer to (5) is greater than the answer to (6),
even though the average rate of return of the income fund is less
than the average rate of return on the equity fund.
DISTRIBUTION OF SERVICE TIMES
The distribution of service times for a given task is approximately

normally distributed with mean 45 minutes and standard deviation 15
minutes.
1. COMPUTE:
a) The percentage of tasks which are completed within 1

hour.
b) The 99th percentile of the distribution.
2. What is the probability that the service time is negative under the
normal distribution assumption? Why is this probability greater
than zero?
3. It costs $10 per hour in labor costs to complete the task.

However if a task is completed within 30 minutes, a bonus of $5
is awarded. What is the average labor cost associated with each
task?
NORMAL CURVE AREAS
AREAS UNDER THE STANDARD NORMAL CURVE FROM 0 TO Z
Z 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517
0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879
0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224
0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549
0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015
1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817
2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857
2.2 0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890
2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
2.4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0.4932 0.4934 0.4936
2.5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952
2.6 0.4953 0.4955 0.4956 0.4957 0.4959 0.4960 0.4961 0.4962 0.4963 0.4964
2.7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0.4974
2.8 0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981
2.9 0.4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986
3.0 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990
EXAMPLE A
P[ 0≤ Z ≤ 1.62] = 0.4474
GRAPH WITH SHADED AREA
Distribution Plot
0.4
0.3 0.4474
Density
0.2
0.1
0.0
0 1.62
Z
EXAMPLE B
P[ -1 ≤ Z ≤ 1.62] = 0.3413 + 0.4474 = 0.7887
Distribution Plot
0.4 0.7887
0.3
Density
0.2
0.1
0.0
-1 0 1.62
Z
EXAMPLE C
P[ Z ≤ 1.62] = 0.5000 + 0.4474 = 0.9474
Distribution Plot
0.4
0.9474
0.3
Density
0.2
0.1
0.0
0 1.62
Z
EXAMPLE D
Find the 80th percentile of the standard normal distribution = P80
Look in the tables for the value of z for which the area
between 0 and z is 0.8000 – 0.5000 = 0.3000.
To two decimal places this value of z = 0.84
Hence P80 = 0.84
Distribution Plot
0.4
0.3
Density
0.8
0.2
0.1
0.0
0 0.84
Z
EXAMPLE E
Find the 20th percentile of the standard normal distribution = P20
Look in the tables for the value of - z for which the area
between –z and 0 0.5000 – 0.2000 = 0.3000.
To two decimal places this value of - z = -0.84
Hence P20 = - 0.84
Distribution Plot
0.4
0.3
Density
0.2
0.1
0.2
0.0
-0.84 0
X
An easier approach is to note that by symmetry:
P20 = - P80
From Example D:
P20 = - P80 = -0.84
SOLUTIONS TO
CASES
EXPECTED VALUES AND OPTIONS
SOLUTIONS
x f(x) x f(x) (x- 25.41)2 f(x)

20 0.05 1.00 1.4634
21 0.06 1.26 1.1669
22 0.07 1.54 0.8140
23 0.08 1.84 0.4646
24 0.09 2.16 0.1789
25 0.12 3.00 0.0202
26 0.15 3.90 0.0522
27 0.13 3.51 0.3287
28 0.10 2.80 0.6708
29 0.10 2.90 1.2888
30 0.05 1.50 1.0534
1.00 25.41 7.5019
1. From the above table:
μ = Expected Value= Mean = 25.41

σ 2 = Variance = 7.5019
σ = Standard Deviation = 7.5019 = 2.74.
2. a. P (25.41–2.74 ≤ X ≤ 25.41+2.74) = P(22.67 ≤ X ≤ 28.15)

P (25.41–2.74 ≤ X ≤ 25.41+2.74) = P (23 ≤ X ≤ 28)
P (23 ≤ X ≤ 28) = f (23) + f (24) + f (25) + f (26) + f (27) + f (28)
= 0.08 + 0.09 + 0.12 + 0.15 + 0.13 + 0.10
= 0.67
b. P (25.41– 5.48 ≤ X ≤ 25.41+5.48) = P(19.93 ≤ X ≤ 30.89)

P(19.93 ≤ X ≤ 30.89) = P (20 ≤ X ≤ 30) = 1
3. From the table below we can obtain the option values for different
scenarios of the price of the stock.
Stock Option Probability

Price Value
x v f(x)
20 0 0.05
21 0 0.06
22 0 0.07
23 0 0.08
24 0 0.09
25 0 0.12
26 1 0.15
27 2 0.13
28 3 0.10
29 4 0.10
30 5 0.05
1.00
From this table we can get the probabilities that the option values will
assume their respective values and thus get the probability distribution
for the option value.
Option Probability
Value
v g(v)
0 0.47
1 0.15
2 0.13
3 0.10
4 0.10
5 0.05
1.00
4. From the above table P(V>0) = 1 – P(V=0) = 1 - 0.47 = 0.53
Or equivalently P(V>0) = P(X≥ 26)

= f(26) + f(27) + f(28)+ f(29) + f(30)
= 0.15 + 0.13 + 0.10 + 0.10 + 0.05
= 0.53
5. Set up the probability distribution for V as follows:
v g(v) v g(v) (v - 1.36)2 g(v)

0 0.47 0 0.86931
1 0.15 0.15 0.01944
2 0.13 0.26 0.05325
3 0.10 0.30 0.26896
4 0.10 0.40 0.69696
5 0.05 0.25 0.66248
1.00 1.36 2.57040
From the above table:
μ = Expected Value= Mean = 1.36
σ 2 = Variance = 2.5704
σ = Standard Deviation = 2.5704 =1.60.
DISCRETE CASE
SOLUTIONS
1. For the probability distribution of X:
PROBABILITY DISTRIBUTION OF X =
Rate of Return on the Equity Fund
x f(x) x f(x) (x-7.5)2 f(x)
-5 0.10 -0.50 15.6250

0 0.20 0 11.2500
5 0.25 1.25 1.5625
10 0.20 2.00 1.25000
15 0.10 1.50 5.62500
20 0.10 2.00 15.6250
25 0.05 1.25 15.3125
1.00 7.50 66.2500
Mean = μ =∑ x f ( x ) =7.50%
Variance = σ 2 =∑ (x-7.50)2 f(x)= 66.25
Standard Deviation= σ = 66.25 = 8.14%
For the probability distribution of Y:
PROBABILITY DISTRIBUTION OF Y =
Rate of Return on the Income Fund
y g(x) yg(y) (y-5.5)2 g(x)
3 0.10 0.30 0.6250
4 0.20 0.80 0.4500
5 0.25 1.25 0.0625
6 0.20 1.20 0.0500
7 0.10 0.70 0.2250
8 0.10 0.80 0.6250
9 0.05 0.45 0.6125

1.00 5.50 2.6500
Mean = μ = ∑ y g( y ) = 5.50
Variance = σ 2 = ∑ (y - 5.5)2 f(x) = 2.6500
Standard Deviation= σ = 2.6500 = 1.63
2. P (-0.64 ≤ X ≤ 15.64) = P (0 ≤ X ≤ 15) = 0.75
3. P (-8.78 ≤ X ≤ 23.78) = P (-5 ≤ X ≤ 20) = 0.95
4. P (3.87 ≤ Y ≤ 7.13) = P (4 ≤ Y ≤ 7) = 0.75
5. P (2.24 ≤Y ≤ 8.76) = P (3 ≤ Y ≤ 8) = 0.95
6. The income fund, because it has a smaller standard deviation

and hence a smaller risk.
NOTE:
P( X ≥ 2.5) = 0.25 + 0.20 + 0.10 + 0.10 + 0.05 = 0.70
P( Y ≥ 2.5) = 1.00
CONTINUOUS CASE
SOLUTIONS
1. P (E > 15) = P (Z > 0. 5) = 0.3085.
2. P (E < 0) = P (Z < -2) = 0.0228.
3. P90 = 12 + 1.28 x 6 = 19.68%.
4. EXPECTED TOTAL SALARY = $70,000 + EXPECTED BONUSES
Expected Bonus 1 = 50000 x P (E > 12) = 50,000 x 0.5 = $25,000
Expected Bonus 2 = 100000 x P (E > 15) = 100,000 x 0.3085 = $30,850
EXPECTED TOTAL SALARY = 70,000 + 25,000 + 30,850 = $125,850
(ALTERNATE SOLUTION)
The total salary a manager will receive is either:

$70,000, $120,000, or $220,000.
The probability distribution of the total salary is given in the table
below:
TOTAL PROBABILITY
SALARY
70000 0.5000
120000 0.1915
220000 0.3085
E (TOTAL SALARY) =
70000 x 0.5 + 120000 x 0.1915 + 220000 x 0.3085 = $125,850
5. P (I > 8) = P (Z > -1.00) = 0.8413.
6. P (E > 8) = P (Z > -0.67) = 0.7486.
7. The standard deviation of the income fund is smaller. As a result,
the income fund is less risky from the point of view that it has a
greater probability of realizing a rate of return of 8% or higher
(84% versus 75%).
DISTRIBUTION OF SERVICE TIMES
1a. P (X < 60) = P (Z < 1) = 0.8413, OR 84%.
1b. TIME = 45 + 2.33 x 15 = 80 minutes.
2. P (X ≤ 0) = P (Z < -3) = 0.0013.
No variable fits the normal distribution exactly. This represents an

approximation error.
3. EXPECTED TOTAL COST = EXPECTED HOURLY COST +

EXPECTED BONUS COST
EXPECTED HOURLY COST = $10.00 x 0.75 hours = $7.50
EXPECTED BONUS COST = $5 x P (X < 30)

= $5 x P (Z < -1.00)
= $5 x 0.1587
= $0.80
EXPECTED TOTAL COST = 7.50 + 0.80 = $8.30

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JP MORGAN

GLOBAL MARKETS and

PROBABILITY AND STATISTICS

BOOT CAMP SESSION

June 18, 2018

TABLE OF CONTENTS ........................................................................................ 2

OBJECTIVES OF THE BOOT CAMP SESSION ..................................................... 3

OUTLINE OF TOPICS ......................................................................................... 4

NOTES ON PROBABILITY, PROBABILITY DISTRIBUTIONS,

NORMAL CURVE AREAS .................................................................................. 34

SOLUTIONS TO CASES .................................................................................... 40

The purpose of this boot camp session is to provide an introduction

The course will be taught in a lecture and discussion mode. Student

The HP 17BII calculator will be used as an aid for carrying out

• Basic Concepts of Probability.

• Continuous Probability Distributions.

AND THE NORMAL DISTRIBUTION

I. Basic Concepts of Probability

We let A be an event which may occur as a result of some

2. Objective or Frequentist Definition of Probability:

Suppose an experiment is repeated n independent times and A

P(A) = limit of the relative frequency of A as n

NOTE: The relative frequency of past sales is generally used as an

Not all situations can be put into the framework of an objective

A financial analyst is looking at daily data on the closing prices of IBM.

At any rate subjective probabilities and objective probabilities follow the

If X is a variable, then the probability function of X is

The mean or Expected Value of X is

The standard deviation of X is

Let B = the number of copies of a given stable title sold on a

f(x) = P[B = x] for x = 5, 6, 7, 8, 9, 10, 11, 12

x f(x) x f(x) (x-8)2 f(x)

a. Probability of selling 7 books on a randomly selected day equals:

b. Probability of selling at least 7 books on a randomly selected day

P( B≥ 7) = f(7) + f(8) + f(9) + f(10) + f(11) + f(12)

d. Variance of the number of books sold per day

e. Standard deviation of the number of books sold per day

f. Probability that the number of books sold on a randomly selected

P( 8.00 – 1.87≤ B ≤ 8.00 + 1.87) =

g. Probability that the number of books sold on a randomly selected

P( 8.00 – 2x1.87≤ B ≤ 8.00 + 2x1.87) =

Empirical Rules say that for distributions not subject to a high

1. The probability that the measurements fall within one standard

2. The probability that the measurements fall within two standard

These rules hold exactly for a normal distribution, which will be

x f(x) x f(x) (x-8)2 f(x)

Probability that the values fall within one standard deviation of

Probability that the values fall within two standard deviations of

The means and standard deviations are generally estimated from

x1, x2, x3…xn

Then the estimated mean is x and the estimated standard deviation is

These sample statistics estimate the values of µ and σ . The values

weighted standard deviation respectively (the weights are the

Let B = the number of copies of a given stable title sold on a

f(x) = P[B = x] for x = 5, 6, 7, 8, 9, 10, 11, 12

Suppose we wish to find the probability distribution of the daily

The probability distribution of Q is given in columns 2 and 3 of

1. The normal distribution is symmetric about its mean. That implies

f (µ + t) = f(µ – t) for all t.

3. The mean = µ and standard deviation = σ completely specify the

4. If X has a normal distribution with mean = µ, then

has a standard normal distribution with mean 0 and standard

Suppose a mutual fund’s annual return (X) is normally distributed