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## STAT201 Probability Theory and Applications

Instructor Name : Education Professor Kwong Koon Shing
Email : kskwong@smu.edu.sg
Tel : 6828-0834
Office : SOE/SOSS 05-059

COURSE DESCRIPTION

The purpose of this course is to develop knowledge of the fundamental probability theory for
quantitatively assessing the uncertain events. The focus in each teaching topic is on the applications
of the probability concepts in everyday life. But practical problems encountered in actuarial science
and finance are particularly emphasized. Topics include overview of probability, probability
distributions, mathematical expectation, some special discrete distributions, some continuous
distributions, functions of random variables, sampling distributions, jointly distributed random
variables, Limit theorems and stochastic process.

LEARNING OBJECTIVES

The main objective of this course is to teach students probability which can be applied in everyday life or
in other disciplines. The features of pedagogical approach used in this course are the followings:
Emphasize verbal interpretations of concepts and methodologies;
Explain theoretical results in laymans terms with minimum amount of mathematical proofs;
Illustrate new concepts with real-life issues in other disciplines, such as economics, business,
finance, insurance and actuarial science etc. Specific real-life applications include:
o Portfolio theory
o Generating random variables and simulation
o Utility function and insurance
o Risk and insurance
o Poisson/exponential modeling applied to real-world phenomena
o Log-normal model applied to long-term stock returns
o The Black-Scholes option pricing

PREREQUISITE

STAT101 or STAT151

ASSESSMENT METHODS

Class Participation : 10%
Assignments : 20%
Mid-term Test : 30%
Final Examination : 40%
Total : 100%

All acts of academic dishonesty (including, but not limited to, plagiarism, cheating, fabrication,
facilitation of acts of academic dishonesty by others, unauthorized possession of exam questions, or
tampering with the academic work of other students) are serious offences.

School of Economics

Term 1

2
All work (whether oral or written) submitted for purposes of assessment must be the students own
work. Penalties for violation of the policy range from zero marks for the component assessment to
expulsion, depending on the nature of the offense.

When in doubt, students should consult the instructors of the course. Details on the SMU Code of
Academic Integrity may be accessed at http://www.smuscd.org/resources.html.

CLASS TIMINGS

Class sessions are of 3-hour duration per week. Each session will involve a lecture and a discussion
of assignments and class works.

Ross, Sheldon, (2014), A First Course in Probability, 9
th
edition, Prentice Hall. (If you have 7
th
or 8
th

edition textbook, you may use it.)
SUPPLEMENTARY TEXT

Hull, John C, (2012), Options, Futures, and Other Derivatives, 8
th
edition, Prentice Hall.

WEEKLY LESSON PLAN

This table provides a tentative course schedule which is subject to change.
Week Topics Chapter
1
Combinatorial Analysis, Overview of
Probability, Conditional Probability and
Independence
Ch 1 -- Ch 3
2
Practical Applications I Ch 1 Ch 3
3
Discrete Random Variables Ch 4
4
Continuous Random Variables Ch 5
5 Jointly Distributed Random Variables
Ch 6
6
Practical Applications II Ch 4 Ch 6
7
Practical Applications III Ch 4 Ch 6
8 RECESS
9
Mid-term test
10
Properties of Expectation

Ch 7
11
Limit Theorems Ch 8
12 Practical Applications IV

13 Practical Applications V
14 Revision Week
15 Examination

Updated on 2 June, 2014