Assignment on

Normal distribution and poision distribution

The ICFAI University Sikkim, ranka road lower sichey, Gangtok east Sikkim

Submitted to : keshar prasad sharma

Submitted by : Ruchi Gupta

BA. Economics 4th sem

18FMUCSKSG05002
In probability theory and statistics, a probability distribution is a mathematical function that provides the
probabilities of occurrence of different possible outcomes in an experiment.[1][2] In more technical terms, the
probability distribution is a description of a random phenomenon in terms of the probabilities of events.[3]
For instance, if the random variable X is used to denote the outcome of a coin toss («the experiment»), then
the probability distribution of X would take the value 0.5 for X = heads, and 0.5 for X = tails (assuming the coin
is fair). Examples of random phenomena can include the results of an experiment or survey.

A probability distribution is specified in terms of an underlying sample space, which is the set of all possible
outcomes of the random phenomenon being observed. The sample space may be the set of real numbers or a
set of vectors, or it may be a list of non-numerical values; For example, the sample space of a coin flip would
be {heads, tails} .

Probability distributions are generally divided into two classes. A discrete probability distribution (applicable
to the scenarios where the set of possible outcomes is discrete, such as a coin toss or a roll of dice) can be
encoded by a discrete list of the probabilities of the outcomes, known as a probability mass function. On the
other hand, a continuous probability distribution (applicable to the scenarios where the set of possible
outcomes can take on values in a continuous range (e.g. real numbers), such as the temperature on a given
day) is typically described by probability density functions (with the probability of any individual outcome
actually being 0). The normal distribution is a commonly encountered continuous probability distribution.
More complex experiments, such as those involving stochastic processes defined in continuous time, may
demand the use of more general probability measures.

A probability distribution whose sample space is one-dimensional (for example real numbers, list of labels,
ordered labels or binary) is called univariate, while a distribution whose sample space is a vector space of
dimension 2 or more is called multivariate. A univariate distribution gives the probabilities of a single random
variable taking on various alternative values; A multivariate distribution (a joint probability distribution) gives
the probabilities of a random vector – a list of two or more random variables – taking on various combinations
of values. Important and commonly encountered univariate probability distributions include the binomial
distribution, the hypergeometric distribution, and the normal distribution. The multivariate normal
distribution is a commonly encountered multivariate distribution.
What is Normal Distribution?
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.

Understanding Normal Distribution

The normal distribution is the most common type of distribution assumed in technical stock market analysis and
in other types of statistical analyses. The standard normal distribution has two parameters: the mean and the
standard deviation. For a normal distribution, 68% of the observations are within +/- one standard deviation of
the mean, 95% are within +/- two standard deviations, and 99.7% are within +- three standard deviations.

The normal distribution model is motivated by the Central Limit Theorem. This theory states that averages
calculated from independent, identically distributed random variables have approximately normal distributions,
regardless of the type of distribution from which the variables are sampled (provided it has finite variance).
Normal distribution is sometimes confused with symmetrical distribution. Symmetrical distribution is one where
a dividing line produces two mirror images, but the actual data could be two humps or a series of hills in addition
to the bell curve that indicates a normal distribution.
KEY TAKEAWAYS
Normal distribution is the proper term for a probability bell curve.

Normal distribution is symmetrical distribution, but not all symmetrical distributions are normal.
In reality, most pricing distributions are not perfectly normal.
Poisson Distribution
A Poisson distribution is the probability distribution that results from a Poisson experiment.

Attributes of a Poisson Experiment

The experiment results in outcomes that can be classified as successes or failures.

The average number of successes (μ) that occurs in a specified region is known.
The probability that a success will occur is proportional to the size of the region.
The probability that a success will occur in an extremely small region is virtually zero.
Note that the specified region could take many forms. For instance, it could be a length, an area, a volume, a
period of time, etc.

Notation
The following notation is helpful, when we talk about the Poisson distribution.

E: A constant equal to approximately 2.71828. (Actually, e is the base of the natural logarithm system.)
Μ: The mean number of successes that occur in a specified region.
X: The actual number of successes that occur in a specified region.
P(x; Μ): The Poisson probability that exactly x successes occur in a Poisson experiment, when the mean number
of successes is μ.

Poisson Distribution
A Poisson random variable is the number of successes that result from a Poisson experiment. The probability
distribution of a Poisson random variable is called a Poisson distribution.

Given the mean number of successes (μ) that occur in a specified region, we can compute the Poisson probability
based on the following formula:

The Poisson distribution has the following properties:

The mean of the distribution is equal to μ .

Poisson Distribution Example

The average number of homes sold by the Acme Realty company is 2 homes per day. What is the probability
that exactly 3 homes will be sold tomorrow?

Solution: This is a Poisson experiment in which we know the following:

Μ = 2; Since 2 homes are sold per day, on average.

E = 2.71828; since e is a constant equal to approximately 2.71828.

P(x; Μ) = (e-μ) (μx) / x!

P(3; 2) = (2.71828-2) (23) / 3!

P(3; 2) = (0.13534) (8) / 6

P(3; 2) = 0.180

Thus, the probability of selling 3 homes tomorrow is 0.180 .

A cumulative Poisson probability refers to the probability that the Poisson random variable is greater than some
specified lower limit and less than some specified upper limit.