Blog Home / Financial Terms / What is Binomial Distribution?

What is Binomial Distribution?

A binomial distribution is a statistical tool used to measure the total number of successes from n independent random variables.

What is Binomial Distribution?

A binomial random variable measures the total number of successes from n independent Bernoulli random variables, where each has a probability of success equal to p. In other words, binomial distributions are used to model counts of independent events. A binomial distribution has two parameters:

  1. n, the number of independent experiments; and
  2. p, the probability that each experiment is successful

Example

$ P_{x}=\sum_{x=0}^{n}\left ( \frac{n}{x} \right )p^{x}q^{n-x} $

$ P_{x} $ = binomial probability

n =number of trials

$ \frac{n}{x} $= combinations

x = number of times for a specific outcome with n trials

p = probability of success on a single trial

q = probability of failure on a single trial

Why is it important?

Banks and other financial organisations use the Binomial Distribution to calculate the chance of borrowers defaulting and use the figure to price insurance and determine how much money to hold in reserve or how much to lend.

Owais Siddiqui
1 min read
Related:
Financial TermsCPD
Dow Theory: Understanding the Primary Trend and the Secondary Trend
Sagar Pujari 04 July 2022
Financial TermsFRM
What is Standard Deviation?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Hedging,Types and Importance
Owais Siddiqui 19 September 2022
Financial TermsFRM
What is Hedging?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Variance
Owais Siddiqui 19 September 2022

Shares

Leave a comment

Your email address will not be published. Required fields are marked *