stor 435 lecture 10

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stor 435 lecture 10

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002 Lecture 10

Ruoyu Wu

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Normal random variables

Definition

X is a normal random variable with parameters µ and σ 2 if its density is

1 (x−µ)2

−

f (x) = √ e 2σ2 , −∞ < x < ∞.

2πσ 2

Notation: X = N (µ, σ 2 ).

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Normal random variables

Note 1:

Importance: many real life distributions follow a normal density curve. We will

see later in Chapter 8 (Lecture 17) that normal distributions arise in an

important result known as Central Limit Theorem.

Examples

//nextsteptestprep.com/2012/04/13/average-lsat-score/

2. Distribution of Physiological measurements: e.g. Blood pressure, beta

carotene levels etc.

3. Used in ranking individuals in large companies. Stack ranking.

4. As a major driving component in financial models. Black-Scholes

model.

5. Approximations to a wide array of other distributions. The Central Limit

theorem. See end of these slides for a specific example.

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Normal random variables

Note 2:

R∞

√ 1 is to have f (x)dx = 1.

2πσ 2 −∞

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Normal random variables

Note 3:

If X = N (µ, σ 2 ) and a, b are two numbers, then the random variable

aX + b = N (aµ + b, a2 σ 2 ).

if X = N (µ, σ 2 ), then

X −µ

= N (0, 1)

σ

is a standard normal. This procedure is called standardizing, and allows all

computations involving N (µ, σ 2 ) to be reduced to those for N (0, 1).

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Normal random variables

Note 4:

If X = N (µ, σ 2 ) then µ = EX, σ 2 = V ar(X).

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Derivation of moments continued

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Normal random variables

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Normal random variables

Note 5:

The cumulative distribution function of N (0, 1) is

Z x

1 y2

Φ(x) = √ e− 2 dy, −∞ < x < ∞,

2π −∞

and cannot be computed explicitly.

For x > 0, Φ(x) are given in Table 5.1 of the textbook. For x < 0, use

Φ(x) = 1 − Φ(−x).

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Normal random variables

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Continuous random variables

(a) P (2 < X < 5); (b) P (X > 0); (c) P (|X − 3| > 6).

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Normal random variables

Let Sn = B(n, p) be the number of successes in n independent Bernoulli

trials. Then, ESn = np, V ar(Sn ) = np(1 − p) and, for large n,1

Sn − np

p ≈ N (0, 1).

np(1 − p)

1

The approximation is quite good for np(1 − p) ≥ 10. Also, compare to Poisson

approximations: p is not small here.

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Normal Approximation to the Binomial

Continuity correction

Slightly subtle point: Binomial distribution is a discrete distribution while

Normal is a continuous distribution. When approximating probabilities of the

Binomial, need the continuity correction

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Schlitz vs Michelbob: Live taste test

https://adland.tv/commercials/

schlitz-schlitz-vs-michelob-live-1981-060-usa

More reading

I http://wwnorton.tumblr.com/post/40864025234/

the-naked-statistics-of-the-1981-schlitz-super-bowl-blin

I http://www.nytimes.com/1981/01/14/business/

advertising-schlitz-to-challenge-michelob-s-taste.html

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Normal Approximation to the Binomial

Example

Ruoyu is the head of a major PR firm and plans an advertising campaign for a VP beer

company. Leveraging on the fact that for non-specialty beers, most people cannot tell

the difference between different brands of beer, he picks 100 affirmed drinkers of Bond

beer and then does a live test on television where these individuals are given VP and

Bond beer in unmarked mugs (so that we may assume each person will chose VP and

Bond with 0.5 chance). Let X be the number of individuals who prefer VP beer. Find

(a) P (X > 40)

(b) P (40 ≤ X ≤ 50).

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Solution contd

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Normal Approximation to the Binomial

Example: The ideal size of an awesome university is 4200. The college, knowing from

past experience that on average only .43 percent of those accepted for admission will

actually attend, uses a policy of approving the applications of 9500 students. Compute

the probability that more than (>) 4200 first-year students attend this college.2

2

I used the data from the Fall 2015 admissions profile of UNC.

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