R9 Common Probability Distributions 01

Chapter 9 - Common Probability Distributions

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1. Probability - All possible outcomes for a variable 14. Continuous

Distribution - Probabilities of all possible outcomes = 1 Uniform
Distribution
2. Discrete - Number of possible outcomes that can be
Formula
Random counted
Variable - Each outcomes there is a measurable and
15. Normal - Function that represents the distribution of
positive probability
Distribution variables as a symmetrical bell-shaped
3. Probability - Denoted p(x) graph
Function - Random variable is equal to specific value - Skewness = 0
- Kurtosis = 3
4. Key 0 < p(x) < 1
Properties of ∑p(x) = 1 16. Multivariate - Specifies the probabilities for a group of
Probability Distribution related random variables
Function - meaningful only if those variables are
dependent on each other
5. Continuous - the number of possible outcomes is infinite,
Random even if lower and upper bounds exist 17. Confidence the range of values within which a
Variable - time is a variable Interval population parameter is estimated to lie
6. Discrete p(x) = 0 when x cannot occur 18. Three Popular 90% confidence interval = mean of - 1.65 to
Distribution p(x) > 0 when x can occur Confidence +1.65
Intervals 95% confidence interval = mean of - 1.96 to
7. Continuous p(x) = 0 when x can occur
+1.96
Distribution p(x₁ < x < x₂) where x₁/x₂ are actual numbers
99% confidence interval = mean of - 2.58 to
8. Cumulative - Another name is "distribution function" +2.58
Distribution - Defines the probability that a random
19. Standard A normal distribution with a mean of 0 and
Function variable takes on a value equal to or less
Normal a standard deviation of 1
(cdf) than a specific
Distribution
- Typically F(X) = P(X) plus everything before
that 20. Z-Value Number of standard errors that a point is
away from the mean
9. Discrete probabilities for all possible outcomes for a
Uniform discrete random variable are equal. 21. Z-Value Forula
Random
Variable
10. Binomial - The number of "successes" in a given 22. Roy's Safety- The optimal portfolio minimizes the
Random number of trials, whereby the outcome can First Ratio probability that the return of the portfolio
Variable be either "success" or "failure" falls below a minimum acceptable level;
- Only 2 trials = (Historical Return - Return
Threshold)/(Volatility)
11. Binomial
Probability 23. SF Ratio
Formula Formula

12. Expected 24. Lognormal - Function e^x where x is normally

Value of a Distribution distributed;
Binomial - Positively skewed;
Probability - Bound to the left by 0
- if x is normal, e^x is lognormal
25. Discretely Compound returns we are familiar with
Compounded given some discrete compounding period
Returns - Same as EAR (effective annual rate)
13. Continuous defined over a range that spans between
Uniform some lower limit, a, and some upper limit b,
Distribution which serves as the parameters of the
distribution
 R9 Common Probability Distributions 02

26. Continuous - Shorter and shorter periods of compounding

Compounding - Formula: e^r - 1
- Formula: ln(S1/S2)
- Formula: ln(1 + HPR)
27. Monte Carlo A process which generates hundreds or thousands of probable performance outcomes based on probability
Simulation distributions for cost and schedule on individual tasks. The outcomes are then used to generate a probability
distribution for the project as a whole
28. Historical - Based on actual changes in value or actual changes in risk factors over some prior period
Simulation - Pros: Don't have to estimate distribution of risk factors
- Cons: Future outcomes for risk factors may be outside the historical range