Example: Successful Trades
Poisson Random Variables
The Poisson distribution is used to model the probability of “rare events” that occur randomly in time, distance or space
Figure 3: Binomial
0.6
0.5
0.4
f(x) 0.3
0.2
0.1
0
0
1
2
x
Example: Successful Trades
A long-term trader compares the annual return on stocks in his portfolio with that of the All Ordinaries Index representing the market average. He believes his chosen stocks return more than the All Ords 70% of the time.
p – the probability of a success in each trial, and n – the number of trials
Also, the symbol “!” means “factorial” n! = n*(n-1)*(n-2)*…*2*1, and
0! = 1 (by definition)
Examples:
Heads, Tails Rent, Own Employed, unemployed Pass, Fail, Purchase, Don’t Purchase Male, Female