Probability and Regression Review
- Risk Management
The first-exam review returns to probability, conditional expectation, and regression. A risk estimate is a conditional statement: it depends on the information set, the horizon, and the event being measured.
Regression makes that dependence explicit. A market beta is a slope from a chosen sample and factor, not a permanent property of the asset. Residual risk remains after the factor is removed, and parameter uncertainty can be material when the sample is short or the regime has changed.
The notes use this review to connect probability calculations with practical risk measurement: define the random variable, state the conditioning information, and check whether the residual assumptions are plausible.