Subject Name: Business Statistics

Topic: Concept of Probability Distributions

Unit-2
Courses: BBA, B.Com, BA (BE) IV Sem.

Dr. Anuj Goel

Associate Professor
School of Business Studies
Shobhit Deemed University, Meerut
 Terminologies in Probability Theory

Probability: If there are n mutually exclusive, exhaustive and equally likely outcomes of an
experiment and if m of them are favorable to an event A, then the probability of occurrence of A,
denoted by P(A) is defined as the ratio m/n.

1. Outcome: If a coin is tossed, when the coin comes to rest, it can show a tail or a head,
each of which is an outcome.
2. Trial: Each roll of a die or toss of a coin is a trial.
3. Experiment: An experiment consists of one or more trials.
4. Favorable Outcome: We roll die and we want to roll a six (we want six on the top face)
and after rolling the six turned up, the six is a favourable outcome.
5. Equally likely outcome: Dice that are fair (not loaded) and cons that are fair (not bent),
each outcome has an equal chance of turning up. The outcomes are equally likely.
6. Event: When tossing a coin or rolling a die, we might want to roll a six or toss a head,
each one is an event.
7. Probability: If a trial has N equally likely outcomes, then the probability of any one of
them is 1/N.
8. Notations: In our equations, we will use the notation P(event) to denote the probability
of an event. Hence, the probability of getting a 4 in tossing a die is equal to 1/6 is denoted
by P(4) = 1/6.

Binomial Distribution

The binomial is a type of distribution that has two possible outcomes (the prefix “bi” means two,
or twice). For example, a coin toss has only two possible outcomes: heads or tails and taking a
test could have two possible outcomes: pass or fail. The first variable in the binomial formula, n,
stands for the number of times the experiment is performed. The second variable, p, represents
the probability of one specific outcome.

Variance= npq
Binomial distributions must also meet the following three criteria:

1. The number of observations or trials is fixed. In other words, you can only figure out the
probability of something happening if you do it a certain number of times. This is
common sense - if you toss a coin once, your probability of getting a tails is 50%. If you
toss a coin a 20 times, your probability of getting a tails is very, very close to 100%.
2. Each observation or trial is independent. In other words, none of your trials have an effect
on the probability of the next trial.
3. The probability of success (tails, heads, fail or pass) is exactly the same from one trial to
another.

Poisson distribution

In probability theory, the Poisson distribution is a very common discrete probability distribution.
A Poisson distribution helps in describing the chances of occurrence of a number of events in
some given time interval or given space conditionally that the value of average number of
occurrence of the event is known. This is a major and only condition of Poisson distribution.

The distribution that arises from the Poisson experiment is termed as Poisson distribution. The
number of successes that are resulting from a Poisson experiment is termed as a Poisson random
variable. If μ is the average number of successes occurring in a given time interval or region in
the Poisson distribution, then the mean and the variance of the Poisson distribution are both
equal to μ.

E(X) = μ and V(X) = σ2 = μ

A Poisson distribution possesses the properties below:

1) The expected value of an distribution s the overall average of the distribution. We use
notation to represents expected value is μx or E(x). In case of Poisson distribution, μx = E(x)
= λ. (‘μ’ is equal to the mean of the distribution).

2) In Poisson distribution we see a very close relationship between the expected mean and
the variance. (sometimes, ‘μ’ is equal to the variance of the distribution).
Normal Distribution

The normal distribution can be characterized by the mean and standard deviation. The mean
determines where the peak occurs, which is at 0 in our figure for all the curves. The standard
deviation is a measure of the spread of the normal probability distribution.

Characteristics of a Normal Curve

1) All normal curves are bell-shaped with points of inflection at μ ± σ.

2) All normal curves are symmetric about the mean μ.
3) The area under an entire normal curve is 1.
4) All normal curves are positive for all x. That is, f(x) > 0 for all x.
5) The limit of f(x) as x goes to infinity is 0, and the limit of f(x) as x goes to negative
infinity is 0. That is: limx→∞f(x)=0 and limx→−∞f(x)=0
6) The shape of any normal curve depends on its mean μ and standard deviation σ.
Z= x- μ/ σ

Importance of Normal Distribution

1. In limiting form, almost all distributions tend to normal distribution.
2. When a variable is not normally distributed, it can be made normally distributed with
the help of some suitable transformations.
3. The distribution of sample mean, sample variance, etc. converge to normal when
sample size is large and as such this distribution forms the basis for tests of
significance.
Assignment:

1. Define probability. Explain the normal and binomial distribution of probability.