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PBOR, Chapter 3: Why do we need to multiply the increment with the probability mass?

Z

zusammen

Member
I've been doing the PBOR for Chapter 3. In some questions (Question 3, part (iv): Risk-averse and risk-seeking, for example) we are asked to, say, 'calculate the probability of each asset yielding a return within each increment'. However, the answer multiplies the increment with the probability mass function. I don't understand why this must be done.

Thanks and best regards,
 
Hi.
Actually, it's the probability density function which is being multiplied by the width of the increment - this produces the probability mass. The comment in the column heading says: "To calculate the probability of obtaining a return within each increment, we have taken the probability density (PDF) and multiplied by the width of the increment (h)."
Hope that helps.
 
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