Binomial Distribution

calender iconUpdated on October 30, 2023
corporate finance and accounting
financial analysis

The binomial distribution is a probability distribution that describes the number of successes in a sequence of n independent trials, each of which has a probability of success.

Assumptions:

  • The trials are independent.
  • Each trial has a constant probability of success p.
  • The number of trials n is finite.

Formula:

The probability of getting exactly k successes in n trials is given by the following formula:

P(X = k) = n choose k * p^k * (1-p)^(n-k)

where:

  • P(X = k) is the probability of getting exactly k successes
  • n is the number of trials
  • k is the number of successes
  • p is the probability of success
  • n choose k is the binomial coefficient, given by the formula:

n choose k = n! / (k! * (n-k)! )

Moments:

The mean (expected value) of a binomial distribution is given by:

E = np

The variance of a binomial distribution is given by:

Var = np(1-p)

Applications:

The binomial distribution is used to model a wide variety of phenomena, including:

  • The number of defective items in a batch of products
  • The number of heads in a coin toss
  • The number of successes in a raffle

Example:

Suppose you have a coin with a probability of heads of 0.4 and you toss it 10 times. The number of heads that you will get in 10 tosses will follow a binomial distribution with n = 10 and p = 0.4. The probability of getting exactly 3 heads is given by:

P(X = 3) = 10 choose 3 * 0.4^3 * (1-0.4)^(10-3) = 0.216

This means that there is a 21.6% chance of getting exactly 3 heads in 10 tosses of a coin with a probability of heads of 0.4.

FAQ's

How do you identify a binomial distribution?

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A distribution can be identified as binomial if it involves a fixed number of trials, each with two possible outcomes. The probability of success must remain constant throughout the trials, and the trials must be independent of one another.

What is the difference between Bernoulli and binomial distribution?

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What is the relationship between binomial and normal distribution?

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When should I use Bernoulli distribution?

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