The conditional expected value of a random variable is best described as the:
- expected value of a random variable given an event or scenario.
- probability-weighted average of the possible outcomes of the random variable.
- weighted average of the probabilities of an event given all possible scenarios.
Solution
A is correct. The conditional expected value of a random variable is the expected value of a random variable given an event or scenario.
B is incorrect because an expected value (not a conditional expected value) is defined as the probability-weighted average of the possible outcomes of the random variable.
C is incorrect because an expected value is not a probability. This answer defines the total probability rule, which is the weighted average of the probabilities of an event given all possible scenarios.
Probability Concepts Learning Outcome
- Explain the use of conditional expectation in investment applications
