pairs arbitrage trade,where he/she short sells A and uses the proceeds to buy stock B.
e: Distinguish between unconditional and conditional probabilities.
Anunconditional probabilityis also called a marginal probability, and it is the most basic type of probability. It is the probability of an event where the occurrence of other events is not important. We might be concerned with the probability of an economic recession where we do not care about interest rates, inflation, etc. In such a case, we would be concerned with the unconditional probability of a recession.
A conditional probabilityis one where the knowledge of some other event is important. We might be concerned about the probability of a recession giventhat the monetary authority increases interest rates. This is a conditional probability. The key thing to look for is "the probability of A given B." This is noted by a vertical bar symbol.
f: Define a joint probability.
Anjoint probabilityis the probability that both events occur at the same time, but neither is certain or a given. We write the probability of A and B as P(AB). Unless both A and B occur, it does not qualify as the event "A and B."
g: Calculate, using the multiplication rule, the joint probability of two events.