Binomial events represent a sequence of identical Bernoulli events. We use the letter “B” to express a Binomial distribution, followed by the number of trials and the probability of success in each one.
Suppose that you bought a single stock of General Motors. Historically, there is a 60% chance that the price of your stock will go up on any given day (that’s when the closing price is higher than the opening price), and a 40% chance it will drop.
With the probability distribution function, we can calculate the likelihood of the stock price increasing 3 times during the 5-work-day week. If we wish to use the probability distribution formula, we need to plug in 3 for “y”, 5 for “n”, and 0.6 for “p”.
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Binomial distribution is among the topics included in the Quantitative Methods module of the CFA Level 1 Curriculum.