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Statistics For Business Analysis: Learning Objectives
Statistics For Business Analysis: Learning Objectives
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Learning Objectives
The properties of a probability distribution To calculate the expected value and variance of a probability distribution To calculate the covariance and its use in finance To calculate probabilities from binomial and Poisson distributions How to use the binomial and Poisson distributions to solve business problems
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Chapter 5
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Random Variables
Discrete Random Variable Continuous Random Variable
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Let X = # heads.
Probability 1/4 = 0.25 2/4 = 0.50 1/4 = 0.25
Probability Distribution
X Value 0
T T H H
T H T H
1 2
Probability 0.50 0.25
= E(X) = Xi P( Xi )
i =1
0 1 2
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= 2 =
[X E(X)] P(X )
2 i i i =1
where: E(X) = Expected value of the discrete random variable X Xi = the ith outcome of X P(Xi) = Probability of the ith occurrence of X
[X
E(X)]2 P(X i ) i
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The Covariance
The covariance measures the strength of the linear relationship between two variables The covariance:
N
XY = [ Xi E( X)][( Yi E( Y )] P( Xi Yi )
i=1
where:
X = discrete variable X Xi = the ith outcome of X Y = discrete variable Y Yi = the ith outcome of Y P(XiYi) = probability of occurrence of the ith outcome of X and the ith outcome of Y
Numerical Problems
Ref. # 5-9 Page No.230: The only information available to you regarding the probability distribution of a set of outcomes is the following list of frequencies: X 0 15 30 45 60 75 Frequency 25 125 75 175 75 25 Construct a probability distribution for the set of outcomes. Find the expected value of an outcome. Compute the variance and standard deviation for the distribution.
Observati on (X) Frequency Probability P(x) X.P(X) Deviation (x-m ean) Deviation Squared*P(X)
a. b.
0 15 30 45 60 75
0.00 -36.75 3.75 -21.75 4.50 -6.75 15.75 8.25 9.00 23.25 3.75 38.25 36.75 Expected value
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X = (-25 50)2 (0.2) + (50 50)2 (0.5) + (100 50)2 (0.3) = 43.30
Y = (-200 95)2 (0.2) + (60 95)2 (0.5) + (350 95)2 (0.3) = 193.71
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XY = (-25 50)(-200 95)(0.2) + (50 50)(60 95)(0.5) + (100 50)(350 95)(0.3) = 8250
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E(X + Y) = E( X) + E( Y )
Variance of the sum of two random variables:
Var(X + Y) = 2 + Y = 2 + 2 + 2 XY X X Y
Standard deviation of the sum of two random variables:
X+ Y = 2 + Y X
E(P) = w E( X) + (1 w ) E( Y )
Portfolio risk (weighted variability)
P = w 2 2 + (1 w )2 2 + 2w(1 - w) XY X Y
Where w = portion of portfolio value in asset X (1 - w) = portion of portfolio value in asset Y
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Portfolio Example
Investment X: Investment Y: X = 50 X = 43.30 Y = 95 Y = 193.21 XY = 8250
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Probability Distributions
Probability Distributions Discrete Probability Distributions Binomial Poisson Hypergeometric Continuous Probability Distributions Normal Uniform Exponential
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Rule of Combinations
The number of combinations of selecting X objects out of n objects is
n Cx =
n! X!(n X)!
P(X) =
n! X X p (1-p)n X ! (n X)!
Example: Flip a coin four times, let x = # heads: n=4 p = 0.5 1 - p = (1 - 0.5) = 0.5 X = 0, 1, 2, 3, 4
P(X) = probability of X successes in n trials, with probability of success p on each trial X = number of successes in sample, (X = 0, 1, 2, ..., n) n = sample size (number of trials or observations) p = probability of success
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P(X = 1) = =
= (5)(0.1)(0.9) 4 = 0.32805
= E(x) = np
2 = np(1 - p)
= np(1 - p)
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Binomial Distribution
Mean
The shape of the binomial distribution depends on the values of p and n
P(X) .6 .4 .2 0 0
n = 5 p = 0.1
X 1 2 3 4 5
P(X)
.6 .4 .2 0 0
n = 5 p = 0.5
X 1 2 3 4 5
Binomial Characteristics
Examples
P(X) .6 .4 .2 0 0
n = 5 p = 0.1
X 1 2 3 4 5
= np = (5)(0.5) = 2.5
= np(1- p) = (5)(0.5)(1 0.5) = 1.118
.6 .4 .2 0
P(X)
n = 5 p = 0.5
X
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Examples:
n = 10, p = 0.35, x = 3: n = 10, p = 0.75, x = 2: P(x = 3|n =10, p = 0.35) = 0.2522 P(x = 2|n =10, p = 0.75) = 0.0004
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Numerical Problems
Ref. # 5-18 Page No.247: For a Binomial distribution with n = 7 and p = 0.2, find a. P(X=5) b. P(X>2) c. P(X<8) d. P(X4) Ans. .0043 .1480 1 .0333
Numerical Problems
Ref. # 5-22 Page No.248: Harley Davidson, director of quality control for the Kyoto Motor company is conducting his monthly spot check of automatic transmissions. In that procedure, 10 transmissions are removed from the pool of components and are checked for manufacturing defects. Historically, only 2% of the transmissions have such flaws. (Assume that flaws occur independently in different transmissions)
a. b. What is the probability that Harleys sample contains more than two transmissions with manufacturing flaws? What is the probability that none of the selected transmissions has manufacturing flaws.
a. b.
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Numerical Problems
Ref. # 5-25 Page No.248: A recent study of how Indians spend their leisure time surveyed workers employed more than 5 years. They determined the probability an employee has 2 weeks of vacation time to be 0.45, 1 week of vacation time to be 0.10, and 3 or more weeks to be 0.20. Suppose 20 workers are selected at random. what is the probability that; 8 have 2 weeks of vacation time? Only one worker has 1 week of vacation time? At most 2 of the workers have 3 or more weeks of vacation time? At least 2 workers have 1 week of vacation time? Ans. 0.1623 0.2702 0.2061 0.6083
a. b. c. d. a. b. c. d.
Numerical Problems
Ref. # 5-26 Page No.248: Harry Ohme is in charge of the electronics section of a large department store. He has noticed that the probability that a customer who is just browsing will buy something is 0.3. Suppose that 15 customers browse in the electronics section each hour. What is the probability that; At least one browsing customer will buy something during a specified hour? At least four browsing customers will buy something during a specified hour? No browsing customers will buy anything during a specified hour? No more than four browsing customers will buy something during a specified hour? Ans. 0.9953 0.7031 0.0047 0.5155
a. b. c. d. a. b. c. d.
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Chapter 5
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e x P( X) = X!
where: X = number of events in an area of opportunity = expected number of events e = base of the natural logarithm system (2.71828...)
=
2 =
=
where = expected number of events
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Graphically:
= 0.50
X 0 1 2 3 4 5 6 7
P(x)
P(X = 2) = 0.0758
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= 3.00
0.25 0.20 0.15
P(x)
P(x)
0.10
0.05
0.10 0.00 0 1 2 3 4 5 6 7
0.00 1 2 3 4 5 6 7 8 9 10 11 12
Numerical Problems
Ref. # 5-28 Page No.255: If the prices of new cars increase an average of four times every 3 years, find the probability of a. No price hikes in a randomly selected period of 3 years. P(X=0) b. Two price hikes P(X=2) c. Four price hikes P(X=4) d. Five or more P(X5) Ans. .0183 .1465 .1954 .3711
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Numerical Problems
Ref. # 5-32 Page No.256: Guy Ford, production supervisor for the Winstead companys Charlottesville plant, is worried about an elderly employees ability to keep up the minimum work pace. In addition to the normal daily breaks, this employee stops for short rest periods an average of 4.1 times per hour. The rest period is a fairly consistent 3 minutes each time. Ford has decided that if the probability of the employee resting for 12 minutes (not including normal breaks) or more per hour is greater than 0.5, he will move the employee to a different job. Should he do so? Ans. Yes, the probability of resting at least 12 minutes is 0.5859
Numerical Problems
Ref. # 5-34 Page No.256: Southwestern Electronics has developed a new calculator that performs a series of functions not yet performed by any other calculator. The marketing department is planning to demonstrate this calculator to a group of potential customers, but it is worried about some initial problems, which have resulted in 4 percent of new calculators developing mathematical inconsistencies. The marketing VP is planning on randomly selecting a group of calculators for this demonstration and is worried about the chances of selecting a calculator that could start malfunctioning. He believes that whether or not a calculator malfunctions is Bernoulli process, and he is convinced that the probability of a malfunctions really about 0.04. Assuming that the VP selects exactly 50 calculators to use in the demonstration, and using the Poisson distribution as an approximation of the binomial, what is the chance of getting at least three calculators that malfunction? No calculators malfunctioning? Ans. 0.3233 0.1353
a.
b. a. b.
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Numerical Problems
Ref. # 5-36 Page No.256: The U.S. Bureau of printing and engraving is responsible for printing this countrys paper money. The BPE has an impressively small frequency of printing errors; only 0.5 percent of all bills are too flawed for circulation. What is the probability that out of a batch of 1000 bills; None are too flawed for circulation? Ten are too flawed for circulation? Fifteen are too flawed for circulation? Ans. 0.00674 0.01813 0.00016
a. b. c.
a. b. c.
e np ( np) x P( X ) = X!
Poisson Distribution can be a reasonable approximation of the Binomial, but only under certain conditions. These conditions occur when n is large and p is small, that is when The number of trials is large (n 20)and The binomial probability of success is small (p < 0.05). with above conditions the mean of Poisson can be substituted by mean of binomial i.e. np
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Where
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The probability that 2 of the 3 selected computers have illegal software loaded is 0.30, or 30%.