Binomial Distribution

Updated on January 5, 2024
Article byPrakhar Gajendrakar
Edited byCollins Enosh
Reviewed byDheeraj Vaidya, CFA, FRM

Binomial Distribution Definition

The binomial distribution is a model that measures the probability of a particular event occuring within a fixed number of trials. It is a discrete probability distribution that is used for studying the occurrence of a desired outcome. The model determines the number of trials required to achieve the desired outcome.

Binomial Distribution formula

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Binomial Distribution (wallstreetmojo.com)

The model is limited by certain assumptions; each trial is assumed to have only an either-or outcome. The model assumes that the result of one trial does not affect the outcome of the next trial. If the number of failures incurred to reach the desired outcome is accounted for, it is considered a negative binomial distribution.

Key Takeaways

  • The binomial distribution is a common probability distribution. It is applied to scenarios where only two possible outcomes are possible.
  • The model works as a discrete distribution (countable outcomes) and is the opposite of a continuous distribution.
  • The binomial distribution in statistics works on three important elements, the number of trials, the frequency of successful trials, and the probability of successful trials.
Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Binomial Distribution Explained

The binomial distribution is a probability distribution model. It follows a discrete distribution pattern where the variables can only be integers—the range is finite. This probability distribution works in a set of parameters and follows several assumptions. Therefore. It presents a limited scope for application. It can only be applied to scenarios that result in an either-or outcomes.

The proof for the probability model was published in 1713—after the death of Swiss mathematician Jakob Bernoulli. The binomial distribution conditions paint a picture where the probable outcome is studied and analyzed to make future predictions. These predictions assist in crucial financial and business decisions.

The binomial distribution graph forms a bell shape on the axis, referring to the increase in probability followed by a steep decline.

Binomial Distribution graph

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Binomial Distribution (wallstreetmojo.com)

Calculation and Formula

The Binomial Distribution Formula is used to calculate the probability of getting ‘x’ successes in the ‘n’ number of independent trials.

The probability is a combination of the number of the trials and the number of successes, represented by ‘nCx.’ nCx is then multiplied by the probability of the success raised to the power of the number of successes represented by ‘px,’ further multiplied by the probability of failure raised to the power of difference between the number of success and number of the trials—represented by (1-p)n-x.

Thus, the probability of obtaining x successes in ‘n’ independent trials of a binomial experiment is given by the following formula:

P(X) = nCpx(1-p)n-x

  • Here ‘P’ is the probability of success.
  • In the above equation, nCis used, which is nothing but a combination formula. The formula to calculate combinations is given as follows:

nC= n! / x! (n-x)! 

  • Here ‘n’ represents the number of items (independent trials), and ‘x’ represents the number of items being chosen at a time (successes).
  • If n=1, the distribution is known as the Bernoulli distribution. The mean of binomial trials is expressed as ‘np’. And the variance of the binomial experiments is denoted by  ‘np(1-p).’

Examples

Let us look at some examples to understand the application of binomial distributions.

Example #1

Let us assume that a school comprises forty students. In the given school, Jane, Jenny, and Judy are friends. The three friends study every day—six times a week. On a given day, an English test is taken. There are only two possible outcomes for the test results—either a success or a failure. For such a scenario, the binomial model checks the probability of all three students passing the test on all the days.

Therefore,

  • The number of trials is limited, n = 6.
  • The number of exclusive outcomes = 2 (pass or fail)
  • All three friends are independent.

Other scenarios where a binomial model can be applied are as follows:

  1. Conducting a survey for positive and negative reviews regarding any product or service.
  2. Only registering a yes or no response to a question, situation, or scenario.
  3. Counting male and female employees in an organization.
  4. Accounting for votes in an election between two parties.

Example #2

Now let us look at an example with calculation.

The number of trials (n) is 10. The probability of success (p) is 0.5. Calculate the probability of getting exactly six successes.

Solution:
Given:

Binomial Distribution calculation example

Based on the given values, the probability is calculated as follows:

Binomial Distribution example solution

P(x=6) = 10C6*(0.5)6(1-0.5)10-6

P(x=6) = (10!/6!(10-6)!)*0.015625*(0.5)4

P(x=6) = 210*0.015625*0.0625

Thus the probability of getting exactly 6 Successes is as follows:

Example solution

P(x=6) = 0.2051

Thus, the probability of getting exactly 6 successes is 0.2051

Mean and Variance

For a binomial distribution, variance is less than the mean. With the Poisson distribution, on the other hand, variance and mean are equal. In contrast, for a negative binomial distribution, the variance is greater than the mean.

The mean, variance, and standard deviation for a given number of successes are represented as follows:

  • Mean, μ = np
  • Variance in binomial experiments is denoted by σ2 = npq.
  • Standard Deviation σ= √(npq)

In this sequence, p denotes the probability of success, and q represents the probability of failure, where q = 1-p.

Negative Binomial Distribution

It is also known as the Pascal Distribution for random variables in a negative binomial experiment. The failures are denoted by ‘r.’ The negative distribution concept sheds light on the number of trials required to attain a fixed number of successes. The failure frequency is denoted by ‘r.’

A simple example would be pulling an Ace card from a deck of 52 cards. Here, pulling an ace is considered a failed outcome, and pulling any other card on repetitive attempts is considered a successful outcome.

So, if an ace is pulled out in the 5th attempt, the number of failures will be denoted by r = 5, and the probability distribution of the pulling out non-Ace cards would be considered a negative binomial distribution.

Properties

The properties are as follows:

  • The model only works in conditions where there are two exclusive outcomes—yes or no, pass or fail, heads or tail, true or false, etc.
  • The number of trials or frequency of repetition is fixed.
  • The success and failure outcomes fluctuate with each trial. The probability of success and failure depends on the former.
  • All the trials and outcomes are independent. One trial does not influence the outcome of the next trial.

Binomial Distribution vs Normal Distribution

The differences are as follows:

  • The binomial probability model is discrete. In contrast, the normal distribution is continuous.
  • The range of the binomial model is finite. In contrast, normal distributions have an infinite range.
  • With the Binomial model, the scope for application is limited. Normal distributions, on the other hand, are used to calculate everyday parameters like model height, population, weight, marks, etc.
  • The Binomial model only allows integer values. Normal distribution allows real numbers as well.

Frequently Asked Questions (FAQs)

1. Is Binomial Distribution discrete or continuous?

It is a discrete distribution and opposes continuous discretion. It is typically employed to determine a probability distribution. The distribution is further constructed to depict discrete scenarios in different fields of work like a business, medical research, statistical calculation, etc.

2. What is a Binomial Distribution table?

The table is used for determining values of different probabilities, using three main components:
• Number of trials
• Frequency of successes
• Probability of successful trials

3. What are the assumptions of Binomial Distribution?

The probability model makes the following assumptions:
• The number of trials is limited.
• There is no interdependency between the two outcomes
• The outcomes can only occur in one of two scenarios.

This article has been a guide to what is Binomial Distribution & definition. We discuss its mean, variance, properties, binomial distribution vs normal distribution & calculation examples. You can learn more about it from the following articles –

Reader Interactions

Leave a Reply

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