Probability Distribution

AAA

DEFINITION of 'Probability Distribution'

A statistical function that describes all the possible values and likelihoods that a random variable can take within a given range. This range will be between the minimum and maximum statistically possible values, but where the possible value is likely to be plotted on the probability distribution depends on a number of factors, including the distributions mean, standard deviation, skewness and kurtosis.

INVESTOPEDIA EXPLAINS 'Probability Distribution'

Academics and fund managers alike may determine a particular stock's probability distribution to determine the possible returns that the stock may yield in the future. The stock's history of returns, which can be measured on any time interval, will likely be comprised of only a fraction of the stock's returns, which will subject the analysis to sampling error. By increasing the sample size, this error can be dramatically reduced.

There are many different classifications of probability distributions, including the chi square, and normal and binomial distributions.

RELATED TERMS
  1. Variance

    The spread between numbers in a data set, measuring Variance ...
  2. Hot Hand

    The notion that because one has had a string of successes, he ...
  3. Skewness

    Describe asymmetry from the normal distribution in a set of statistical ...
  4. Tail Risk

    A form of portfolio risk that arises when the possibility that ...
  5. Homoskedastic

    A statistics term indicating that the variance of the errors ...
  6. Kurtosis

    A statistical measure used to describe the distribution of observed ...
RELATED FAQS
  1. How do you calculate the geometric mean to assess portfolio performance?

    The geometric mean is used to calculate the central tendency of a set of numbers. It is the average of the logarithmic values ... Read Full Answer >>
  2. What are the most effective ways to reduce moral hazard?

    There are a number of ways to reduce moral hazard, including the offering of incentives, policies to prevent immoral behavior ... Read Full Answer >>
  3. What is the difference between a simple random sample and a stratified random sample?

    Simple random samples and stratified random samples differ in how the sample is drawn from the overall population of data. ... Read Full Answer >>
  4. What are the advantages and disadvantages of using systematic sampling?

    As a statistical sampling method, systematic sampling is simpler and more straightforward than random sampling. It can also ... Read Full Answer >>
  5. What is the difference between the standard error of means and standard deviation?

    The standard deviation, or SD, measures the amount of variability or dispersion for a subject set of data from the mean, ... Read Full Answer >>
  6. What is the theory of asymmetric information in economics?

    The theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena ... Read Full Answer >>
Related Articles
  1. Investing Basics

    What Are The Odds Of Scoring A Winning Trade?

    Just because you're on a winning streak doesn't mean you're a skilled trader. Find out why.
  2. Fundamental Analysis

    Find The Right Fit With Probability Distributions

    Discover a few of the most popular probability distributions and how to calculate them.
  3. Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

    This technique can reduce uncertainty in estimating future outcomes.
  4. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  5. Fundamental Analysis

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  6. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  7. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  8. Fundamental Analysis

    What is Quantitative Analysis?

    Quantitative analysis refers to the use of mathematical computations to analyze markets and investments.
  9. Fundamental Analysis

    Understanding the Simple Random Sample

    A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen.
  10. Economics

    What is Systematic Sampling?

    Systematic sampling is similar to random sampling, but it uses a pattern for the selection of the sample.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center