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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Probability Density and the Normal Probability Function

Definition

A probability density is a mathematical description of how likely a particular outcome is, when measuring something.

The normal probability function is one particular probability density commonly used as a reasonable approximate description of many circumstances in life.

How are they used?

Histograms

A histogram is a chart which shows how frequently each result occurs in something. So, for example, if you measured the weights of 726 people, each to the nearest 5 kilogrammes, and drew a histogram, you might get something like Figure 47, with the most common weight in the middle. The height of each column shows how many people have that weight.

When you draw a histogram, the ...

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