




The law of large numbers is a law of probability theory. The mathematical definition of the law of large numbers is that a random sample approaches the expected value of the population as the sample grows. For example, flip a coin ten times and it might come up heads every time. The law of large numbers dictates that if the coin is flipped a million times, the results should be 50/50 heads versus tails. Assuming that investors earn about 7% annually, the law of large numbers suggests that an individual investor will earn that same 7% over time. The law of large numbers can also be applied to earnings growth. It is easier for a company's sales to grow at twenty percent if sales are one million dollars. The law of large numbers states that it is harder to achieve that growth rate if sales are ten billion dollars. The law of large numbers also implies that the probability of a rare event occurring (e.g. winning the lottery) decreases as the number of participants increases.
Rate this law of large numbers definition...




Where is the market headed? The answer may surprise you. Find out with the exclusive & Barron's recommended charts of Chart of the Day. 

Popular Terms: average price per share, labor relations, APR, in escrow, liquidity ratio, retained earnings, cancelled check, required rate of return, quality assurance, annual return, stock market close, VIX, exdividend date, FICO score, implied volatility, limit order, stock split, 1031 exchange, whollyowned subsidiary, EBITDA, option premium, real GDP, exdividend, reverse mortgage, inflation, deferred tax, class C shares, dividends payable, command economy, debt service coverage, irrevocable trust, margin rate, minority interest, balance sheet, per diem, FTSE, 1035 exchange, current ratio, risk management, diluted share, 144a, phantom income, LIBOR, open position, Zero Cost Collar, 401a, covered put, deferred revenue, Key Rate Duration


 