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ICAP PRC-2 · QUANTITATIVE ANALYSIS FOR BUSINESS · CHAPTER 12

Probability Distributions

Key Definitions · Core Concept · Key Rules & Principles · Formula Zone — Discrete Distributions · Formula Zone — Normal Distribution · Step-by-step Methods · Different Cases / Scenarios

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1

Chapter Overview

🧭

Your visual roadmap through the chapter

Binomial

Fixed trials, 2 outcomes, constant probability

Hyper-geometric

Sampling without replacement

Poisson

Events at a constant average rate

Normal

Continuous, bell-shaped; ± approximations

Theoretical probability distributions used to estimate the probability of a given result when a sample is taken from a population with known characteristics.

Choosing and applying the right distribution is central to quality control, risk estimation and forecasting problems in business.

Recognise which distribution applies; calculate probabilities using each formula; use Poisson/Normal tables; apply the normal approximation with continuity correction.

2

Key Definitions

📘

Source-based terminology, exam-ready

Probability Distribution

Similar to a frequency distribution but using probabilities instead of frequencies; the total always equals 1.

Key word: totals to 1

Probability Function

A formula giving the probability of a random variable taking a specific value.

Key word: formula for P(x)

Theoretical vs Experimental

Theoretical distributions give expected probability when outcomes are equally likely; experimental distributions result from actual observed occurrences.

Key word: expected vs observed

Discrete vs Continuous Distribution

Discrete distributions record a finite number of outcomes; continuous distributions record an infinite number of possibilities (e.g. time, distance).

Key word: finite vs infinite

Binomial Distribution

Applies to a discrete variable with a fixed number of independent trials, each with two outcomes and a known, constant probability of success.

Key word: fixed trials, constant p

Hyper-geometric Distribution

Applies when a sample is randomly selected WITHOUT replacement from a population with two types of items; trials are dependent.

Key word: no replacement

Poisson Distribution

A discrete distribution for events that occur randomly, independently, singly, and at a constant average rate, over a period of time or space.

Key word: rate, not probability

Normal Distribution & Z-score

A symmetric, bell-shaped continuous distribution. The Z-score (standardized normal variate) measures how many standard deviations a value is from the mean.

Key word: Z=(x−μ)/σ

3

Core Concept

🎯

Explained in exam-oriented language

CONCEPT → Discrete Distributions

MEANING

Binomial, Hyper-geometric and Poisson each model a countable number of "successes" under different conditions.

PURPOSE

Estimate the probability of a specific count of outcomes.

APPLICATION

Quality control (defect counts), sampling problems, event-rate forecasting.

CONCEPT → Normal Distribution

MEANING

A continuous, symmetric bell-shaped distribution fitting many naturally occurring variables.

PURPOSE

Estimate the probability of a value falling in a given range using Z-scores and tables.

APPLICATION

Heights, weights, product dimensions; also approximates Binomial/Poisson when conditions are met.

4

Key Rules & Principles

📏

Conditions for each distribution to apply

RULE 1 Binomial — 4 conditions

Fixed number of trials; each trial independent

Each trial has exactly two outcomes (success/failure)

Probability of success is known and CONSTANT for every trial (implies replacement, or a population so large the effect is negligible)

RULE 3 Poisson — 4 conditions

Events occur randomly, independently, and singly (one at a time)

Events happen, on average, at a constant rate (λ)

Models HOW OFTEN something happens, not the probability of one trial

RULE 4 Normal distribution & approximations

Normal curve: symmetric, bell-shaped; mean = median = mode; total area = 1

Normal approximates Binomial when 0.1<p<0.9 and np>5

Normal approximates Poisson when λ > 30

Poisson can approximate Binomial when n is large and p is small

A continuity correction (±0.5) is required whenever a continuous distribution approximates a discrete one

RULE 2 Hyper-geometric — 4 conditions

Outcomes classified success/failure; sample taken WITHOUT replacement

Probability of success CHANGES each trial — trials are dependent

The experiment is repeated a definite number of times

5

Formula Zone — Discrete Distributions

🧮

Every formula supported by the source text

BINOMIAL DISTRIBUTION

P(x) = [n!÷(x!(n−x)!)] px qn−x

p=P(success), q=P(failure)=1−p, n=sample size. Mean=np; SD=√(npq).

HYPER-GEOMETRIC DISTRIBUTION

P(x) = [kCx × (N−k)C(n−x)] ÷ NCn

N=population size, n=sample size, k=possible successes in population, x=successes in sample.

POISSON DISTRIBUTION

P(x) = (e−λ λx) ÷ x!

λ=average rate; e=2.71828. Mean=λ=np; SD=√λ.

POISSON RECURSIVE SHORTCUT

P(n) = P(n−1) × λ÷n

Each successive probability = previous probability × λ/n. P(x=0) is always e−λ.

Choosing Between "or fewer" and "at least" (Poisson & Binomial ranges)

"x or fewer": sum the individual probabilities of 0 up to x (or read directly from a cumulative table).

"at least x" (= x or more): since all probabilities sum to 1, calculate 1 − P(fewer than x) instead of summing an open-ended list.

5

Formula Zone — Normal Distribution

🧮

Every formula supported by the source text

Z-SCORE (STANDARDIZED NORMAL VARIATE)

Z = (x − μ) ÷ σ

x=value under investigation, μ=mean, σ=standard deviation. Converts any normal distribution to the standard one (mean 0, SD 1).

NORMAL APPROXIMATION TO BINOMIAL

Mean = np | SD = √[np(1−p)]

Valid when 0.1<p<0.9 and np>5. Requires continuity correction.

NORMAL APPROXIMATION TO POISSON

Mean = λ | SD = √λ

Valid when λ > 30. Requires continuity correction.

KEY AREAS UNDER THE NORMAL CURVE

μ±1σ=68% | μ±2σ=95.5% | μ±3σ=99.7%

Also: ±1.96σ encloses 95%; ±2.58σ encloses 99% of the total distribution.

Continuity Correction Table (discrete event → corrected normal range)

Discrete eventNormal-approximation correction
Exactly 10 successes: P(x=10)P(9.5 ≤ x ≤ 10.5)
More than 10: P(x>10)P(x > 10.5)
10 or more: P(x≥10)P(x > 9.5)
Fewer than 10: P(x<10)P(x < 9.5)
10 or fewer: P(x≤10)P(x < 10.5)
6

Calculation Roadmap

🗺️

General path for any distribution question

1· Read Question

Note trials, replacement, and what's asked

2· Identify Distribution

Binomial, Hyper-geometric, Poisson, or Normal?

3· Select Formula

Direct calc, table lookup, or approximation

4· Substitute

Put known values into the formula

5· Calculate & Check

Solve, recheck, state final answer

7

Step-by-step Methods

🪜

Kept separate — do not mix methods

METHOD A · Binomial Probability

  1. 1Confirm the 4 binomial conditions are met; identify n, p, q, x
  2. 2Calculate the binomial coefficient n!÷[x!(n−x)!]

METHOD D · Normal Distribution (Find a Probability)

  1. 1Identify the mean (μ), standard deviation (σ), and value(s) x
  2. 2Calculate Z = (x−μ)÷σ for each value
  3. 3Look up the Z value in the normal table (area for half the curve)
  4. 4Add/subtract 0.5 or combine areas depending on what's asked (above/below/between)

3 Multiply by px and qn−x (p to the x, q to the n−x)

  1. 4For a range, sum individual P(x) values or use the complement

METHOD B · Hyper-geometric Probability

  1. 1Identify N (population), n (sample), k (successes in population), x (successes wanted)
  2. 2Calculate kCx and (N−k)C(n−x) separately
  3. 3Multiply those two together
  4. 4Divide by NCn

METHOD E · Normal Distribution (Find a Value from %)

  1. 1Identify the target proportion/percentile
  2. 2Look up the matching Z value in the normal table (reverse lookup)
  3. 3Rearrange Z=(x−μ)/σ to x = μ ± Zσ
  4. 4Substitute μ, σ and Z to find x

METHOD C · Poisson Probability

  1. 1Identify λ (average rate) for the period/space asked about — rescale if needed

METHOD F · Normal Approximation (Binomial or Poisson)

  1. 1Check the approximation condition is met (0.1<p<0.9 & np>5, or λ>30)
  2. 2Calculate the approximating mean and SD
  3. 3Apply the continuity correction (±0.5) to match the wording
  4. 4Calculate Z and read off the probability as in Method D

2 Calculate e−λ once

3 Substitute into P(x)=e−λλx/x!, or use the recursive shortcut for consecutive x values

  1. 4For "at least", use 1−P(fewer)
8

Different Cases / Scenarios

🔀

Recognise the situation, pick the right distribution

IF trials are fixed, independent, WITH replacement (or a huge population)

→ USE the Binomial distribution

IF sampling is WITHOUT replacement from a small/finite population

→ USE the Hyper-geometric distribution

IF you're counting random events over time/space at a constant rate

→ USE the Poisson distribution

IF the variable is continuous and roughly bell-shaped/symmetric

→ USE the Normal distribution

IF n is large and p is small (Binomial hard to compute directly)

→ Approximate with Poisson

IF n is large and 0.1<p<0.9 with np>5

→ Approximate the Binomial with the Normal (+ continuity correction)

IF λ (Poisson rate) is greater than 30

→ Approximate the Poisson with the Normal (+ continuity correction)

IF asked for "at least"/"more than" x

→ USE the complement: 1 − P(fewer than/up to x)

9

Comparison Tables

⚖️

Don't confuse these!

BinomialHyper-geometricPoisson
ReplacementWith (or negligible effect)WithoutN/A — models a rate
TrialsIndependent, fixed nDependent, fixed nIndependent, over time/space
Probability of successConstant (p)Changes each trialGoverned by constant rate λ
Discrete Distributions (Binomial/Hyper-geo/Poisson)Normal Distribution
Variable typeDiscrete (countable)Continuous
OutputExact P(x) for a whole-number countArea/probability over a range, via Z-score
Link between them—Normal can approximate Binomial/Poisson (with continuity correction)
Normal ApproximationConditionMean & SD Used
To Binomial0.1 < p < 0.9 and np > 5Mean=np, SD=√[np(1−p)]
To Poissonλ > 30Mean=λ, SD=√λ
10

Reading Tables & the Normal Curve

📌

How to interpret the source's tools

Reading a Poisson table

Columns are values of λ; rows are values of x. The cell gives P(x) directly for that combination — no calculation needed. A cumulative Poisson table instead gives P(x or fewer).

Reading the Normal (Z) table

The table gives the area between the mean and Z standard deviations — i.e. HALF the distribution only. Combine areas (add or subtract 0.5) depending on whether the question asks above/below/between values.

Reading the normal curve shape

A higher standard deviation gives a flatter, more spread-out curve; a lower standard deviation gives a taller, narrower curve. All normal curves are symmetric about the mean regardless of shape.

Combining Z areas for a range

For a value between two points straddling the mean, ADD the two individual Z areas. For two points on the same side of the mean, SUBTRACT the smaller Z area from the larger.

11

Worked Calculation Logic

✍️

Method students must reproduce in the exam

BINOMIAL: GIVEN → FORMULA → SUBSTITUTION → ANSWER

10% of homes have an occupant aged 90+. What is the probability that a sample of 10 homes contains exactly 2 such homes?

GIVEN: n=10, p=0.1, q=0.9, x=2

FORMULA: P(x) = [n!/(x!(n−x)!)] pxqn−x

SUBSTITUTION: P(2) = [10!/(2!8!)] × 0.1² × 0.9⁸=45×0.01×0.4305

ANSWER: P(2) = 0.1937 or 19.37%

NORMAL: GIVEN → FORMULA → SUBSTITUTION → ANSWER

Bags of sugar: mean=1,010g, SD=5g. What's the probability a bag weighs less than 1,000g?

GIVEN: x=1,000, μ=1,010, σ=5

FORMULA: Z=(x−μ)/σ

SUBSTITUTION: Z=(1,000−1,010)/5 = −2. Table: area for Z=2 is 0.4772

ANSWER: P(x<1,000) = 0.5−0.4772 = 0.0228 or 2.28%

12

Exam Question Patterns

📝

Identification — which distribution applies to a described scenario

Direct calculation — Binomial, Hyper-geometric or Poisson P(x)

Table reading — Poisson or Normal Z tables

Normal probability — using Z-scores for a range

Reverse lookup — finding x from a given percentage

Normal approximation with continuity correction

13

Exam Traps

⚠️

⚠ WATCH OUT

  • ✗ Wrong distribution choice — check replacement (Binomial) vs no replacement (Hyper- geometric) carefully.
  • ✗ Forgetting the continuity correction when using Normal to approximate a discrete distribution.
  • ✗ Reading the Z table as the full probability — it only gives HALF the distribution's area.
  • ✗ Sign/direction errors — a negative Z means below the mean; check which side the question needs.
  • ✗ "At least" vs "more than" — these use different correction boundaries (9.5 vs 10.5); check the continuity correction table.
14

Quick Decision Tree

🌳
QUESTION GIVEN
↓
Discrete count, or continuous variable?
↓
Discrete → replacement? Binomial : Hyper-geo;
↓
or rate → Poisson
↓
Continuous → Normal
↓
(Z-score)
↓
CALCULATE → CHECK → FINAL ANSWER
⚡

Chapter 12 in 60 Seconds

⚡

Binomial: replacement, constant p, mean=np

Hyper-geo: no replacement, dependent trials

Poisson: constant rate λ, mean=λ

Normal: Z=(x−μ)/σ, table=half curve

Approx Binomial→Poisson: n large, p small

Approx →Normal: np>5 or λ>30

Continuity correction: ±0.5 "At least x" = 1−P(fewer than x)

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All PRC-2 QAB revision notes
  1. Linear and Quadratic Equations
  2. Coordinate System and Its Application
  3. Mathematical Progression
  4. Linear Programming
  5. Financial Mathematics
  6. Discounted Cash Flows
  7. Data – Collection and Representation
  8. Statistical Measures of Data
  9. Indices
  10. Correlation and Regression
  11. Probability Concepts
  12. Probability Distributions