OR2 Lecture 2

Dr. Moayad Tanash

 Binomial distribution
• In binomial probability distribution, the number
of ‘Success’ in a sequence of n experiments,
where each time a question is asked for yes-no,
then the boolean-valued outcome is represented
either with success/yes/true/one (probability p)
or failure/no/false/zero
Binomial distribution

• As we already know, binomial distribution gives the possibility of a different set

of outcomes. In real life, the concept is used for:
• Finding the quantity of raw and used materials while making a product.
• Taking a survey of positive and negative reviews from the public for any specific
product or place.
• By using the YES/ NO survey, we can check whether the number of persons
views the particular channel.
• To find the number of male and female employees in an organisation.
• The number of votes collected by a candidate in an election is counted based on 0
or 1 probability.
Binomial distribution
• The binomial distribution formula is for any random variable X, given
by;

• n = the number of experiments

• x = 0, 1, 2, 3, 4, …
• p = Probability of Success in a single experiment
• q = Probability of Failure in a single experiment = 1 – p
• The binomial distribution formula can also be written in the form of n-
Bernoulli trials, where
Binomial Distribution Mean and Variance

• For a binomial distribution, the mean, variance and standard deviation

for the given number of success are represented using the formulas
• Mean, μ = np
• Variance, σ2 = npq
• Standard Deviation σ= √(npq)
• Where p is the probability of success
• q is the probability of failure, where q = 1-p
Binomial distribution
Example
Poisson Distribution Definition
• The Poisson distribution is a discrete probability function that means
the variable can only take specific values in a given list of numbers,
probably infinite. A Poisson distribution measures how many times an
event is likely to occur within “x” period of time.
• In other words, we can define it as the probability distribution that
results from the Poisson experiment. A Poisson experiment is a
statistical experiment that classifies the experiment into two
categories, such as success or failure. Poisson distribution is a limiting
process of the binomial distribution.
Poisson Distribution Definition
• A Poisson random variable “x” defines the number of successes in the
experiment. This distribution occurs when there are events that do not
occur as the outcomes of a definite number of outcomes. Poisson
distribution is used under certain conditions. They are:
• The number of trials “n” tends to infinity
• Probability of success “p” tends to zero
• np = 1 is finite
Poisson Distribution Definition
• The formula for the Poisson distribution function is given by:

• Where,
• e is the base of the logarithm
• x is a Poisson random variable
• λ is an average rate of value
• The mean and the variance of Poisson are:
Poisson distribution
Example
Negative Exponential distribution
• The exponential distribution (also called the negative exponential
distribution) is a probability distribution that describes time between
events in a Poisson process.

• There is a strong relationship between the Poisson distribution and the

Exponential distribution.

• For example, let’s say a Poisson distribution models the number of

births in a given time period. The time in between each birth can be
modeled with an exponential distribution (Young & Young, 1998).
Negative Exponential distribution
Figure
Example
Normal Dist
• Normal distribution, also known as the Gaussian distribution, is a
probability distribution that is symmetric about the mean, showing that data near
the mean are more frequent in occurrence than data far from the mean. In graph
form, normal distribution will appear as a bell curve.

KEY TAKEAWAYS

• A normal distribution is the proper term for a probability bell curve.

• In a normal distribution the mean is zero and the standard deviation is 1. It has
zero skew and a kurtosis of 3.
• Normal distributions are symmetrical, but not all symmetrical distributions are
normal.
• In reality, most pricing distributions are not perfectly normal.
Normal Dist
Normal Dist
Normal Dist
Example
EMPIRICAL distributions
Example