Financial Terms
Probability distribution

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Definition of Probability distribution

Probability Distribution Image 1

Probability distribution

Also called a probability function, a function that describes all the values that the random variable can
take and the probability associated with each.

Probability Distribution

A list of all possible outcomes and the chance of each outcome

probability distribution

a range of possible values for which each value has an assigned likelihood of occurrence

Related Terms:

Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

Normal probability distribution

A probability distribution for a continuous random variable that is forms a
symmetrical bell-shaped curve around the mean.

Expected return

The return expected on a risky asset based on a probability distribution for the possible rates
of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate)
plus a risk premium (the difference between the historic market return, based upon a well diversified index
such as the S&P500 and historic U.S. Treasury bond) multiplied by the assets beta.

Expected value

The weighted average of a probability distribution.

Monte Carlo simulation

An analytical technique for solving a problem by performing a large number of trail
runs, called simulations, and inferring a solution from the collective results of the trial runs. Method for
calculating the probability distribution of possible outcomes.

Probability Distribution Image 2

Normal random variable

A random variable that has a normal probability distribution.

Random walk

Theory that stock price changes from day to day are at random; the changes are independent
of each other and have the same probability distribution. Many believers of the random walk theory believe
that it is impossible to outperform the market consistently without taking additional risk.

Skewed distribution

probability distribution in which an unequal number of observations lie below and
above the mean.

total expected value (for a project)

the sum of the individual cash flows in a probability distribution multiplied by their related probabilities

Base probability of loss

The probability of not achieving a portfolio expected return.


Payments from fund or corporate cash flow. May include dividends from earnings, capital
gains from sale of portfolio holdings and return of capital. Fund distributions can be made by check or by
investing in additional shares. Funds are required to distribute capital gains (if any) to shareholders at least
once per year. Some Corporations offer Dividend Reinvestment Plans (DRP).

Frequency distribution

The organization of data to show how often certain values or ranges of values occur.

Lognormal distribution

A distribution where the logarithm of the variable follows a normal distribution.
Lognormal distributions are used to describe returns calculated over periods of a year or more.


The relative likelihood of a particular outcome among all possible outcomes.

Probability Distribution Image 3

Probability density function

The probability function for a continuous random variable.

Probability function

A function that assigns a probability to each and every possible outcome.

Standardized normal distribution

A normal distribution with a mean of 0 and a standard deviation of 1.

distribution cost

a cost incurred to warehouse, transport, or deliver a product or service

Normal (bell-shaped) distribution

In statistics, a theoretical frequency
distribution for a set of variable data, usually represented by a bell-shaped
curve symmetrical about the mean.

Distribution center

A branch warehouse containing finished goods and service
items intended for distribution directly to customers.

Distribution inventory

Inventory intended for shipment to customers, usually
comprised of finished goods and service items.

Binomial model

A method of pricing options or other equity derivatives in
which the probability over time of each possible price follows a binomial
distribution. The basic assumption is that prices can move to only two values
(one higher and one lower) over any short time period.







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