Empirical rule

Definition

Empirical Rule states that for a normal distribution, nearly all data falls within three standard deviations of the mean. Specifically, 68% falls within one standard deviation, 95% within two, and 99.7% within three.

5 Must Know Facts For Your Next Test

1. 1. The Empirical Rule is also known as the 68-95-99.7 rule.
2. 2. It applies only to normal distributions or bell-shaped curves.
3. 3. Knowing this rule helps in estimating probabilities and making financial forecasts based on historical data.
4. 4. The rule assists in identifying outliers in a dataset by highlighting values that fall outside three standard deviations.
5. 5. Financial analysts use it to assess risk and return by analyzing past performance data.

Review Questions

• 1. What percentage of data falls within two standard deviations of the mean according to the Empirical Rule?
• 2. How can the Empirical Rule help identify outliers in a dataset?
• 3. Why is the Empirical Rule particularly useful for financial analysts?

Related terms

Standard Deviation:

A measure of how spread out numbers are around the mean in a dataset

Normal Distribution:

A probability distribution that is symmetric about the mean, showing that data near the mean are more frequent in occurrence

Probability Density Function:

Function that describes the likelihood of a random variable taking on a particular value