Probability Distribution


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.

BREAKING DOWN '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.

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