Chapter 6 Business Statistics

Objectives
Chapter 6 In this chapter, you learn:

To compute probabilities from the normal distribution.
The Normal Distribution How to use the normal distribution to solve business
problems.
To use the normal probability plot to determine whether
a set of data is approximately normally distributed.
ALWAYS LEARNING Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide 1 ALWAYS LEARNING Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide 2
Continuous Probability
Continuous Probability Distributions Distributions Vary By Shape
A continuous variable is a variable that can
assume any value on a continuum (can
assume an uncountable number of values):
thickness of an item.
time required to complete a task.
temperature of a solution.
height, in inches. • Symmetrical • Symmetrical • Right skewed
• Bell-shaped • Also known as • Mean > Median
• Ranges from Rectangular • Ranges from
These can potentially take on any value negative to Distribution zero to
depending only on the ability to precisely and positive infinity • Every value between positive infinity
the smallest & largest
accurately measure. is equally likely
The Normal Distribution
The Normal Distribution Shape
‘Bell Shaped.’
Symmetrical.
f(X) f(X)
Mean, Median and Mode are Changing μ shifts the
equal. distribution left or right.
Location is determined by the σ
mean, μ. X Changing σ increases
Spread is determined by the μ or decreases the
standard deviation, σ. σ spread.
Mean
The random variable has an
infinite theoretical range: = Median
-f to +f. = Mode μ X
The Normal Distribution

By varying the parameters μ and σ, we
obtain different normal distributions Density Function
The formula for the normal probability density function is:

2
1 § (X μ) ·
1 ¨ ¸
2© V ¹
f(X) e
2πV
Where e = the mathematical constant approximated by 2.71828
π = the mathematical constant approximated by 3.14159
μ = the population mean
A and B have the same mean but different standard deviations. σ = the population standard deviation
X = any value of the continuous variable
B and C have different means and different standard deviations.
The Standardized Normal Translation to the Standardized
Normal Distribution
Any normal distribution (with any mean and
standard deviation combination) can be Translate from X to the standardized normal
transformed into the standardized normal (the “Z” distribution) by subtracting the mean
distribution (Z).
of X and dividing by its standard deviation:
To compute normal probabilities need to

transform X units into Z units. X μ
Z
The standardized normal distribution (Z) has a
σ
mean of 0 and a standard deviation of 1. The Z distribution always has mean = 0 and
standard deviation = 1.
The Standardized The Standardized Normal

Normal Distribution Probability Density Function
Also known as the “Z” distribution. The formula for the standardized normal
Mean is 0. probability density function is:
Standard Deviation is 1.
1 (1/2)Z 2
f(Z) f(Z) e
2π
1
Where e = the mathematical constant approximated by 2.71828
0 Z π = the mathematical constant approximated by 3.14159
Values above the mean have positive Z-values. Z = any value of the standardized normal distribution
Values below the mean have negative Z-values.

Example Comparing X and Z units
If X is distributed normally with mean of 100

and standard deviation of 50, the Z value for
X = 200 is:
X μ $200 $100 100 200 X (μ = 100, σ = 50)
Z 2.0
σ $50 0 2.0 Z (μ = 0, σ = 1)
This says that X = 200 is two standard Note that the shape of the distribution is the same,
only the scale has changed. We can express the
deviations (2 increments of 50 units) above problem in the original units of X or in standardized
the mean of 100. units (Z).
Probability as
Finding Normal Probabilities Area Under the Curve
The total area under the curve is 1.0, and the curve is
Probability is measured by the area symmetric, so half is above the mean, half is below.
under the curve.
f(X) P( f X μ) 0.5 P(μ X f ) 0.5
f(X) P (a ≤ X ≤ b)
= P (a < X < b)
(Note that the 0.5 0.5
probability of any
individual value is zero.)
μ X
a b X
P( f X f ) 1.0
The Cumulative Standardized The Cumulative Standardized
Normal Table Normal Table
(continued)
The Cumulative Standardized Normal table in The column gives the value of
the textbook (Appendix table E.2) gives the Z to the second decimal point.
probability less than a desired value of Z (i.e., Z 0.00 0.01 0.02 …
from negative infinity to Z).
The row shows 0.0
the value of Z 0.1
0.9772 . The value within the
Example: to the first .
decimal point. . table gives the
P(Z < 2.00) = 0.9772 2.0 .9772 probability from Z = f
up to the desired Z
0 2.00 Z value.
2.0
P(Z < 2.00) = 0.9772
General Procedure for

Finding Normal Probabilities Finding Normal Probabilities
Let X represent the time it takes (in seconds)
To find P(a < X < b) when X is distributed to download an image file from the internet.
normally: Suppose X is normal with a mean of 18.0
seconds and a standard deviation of 5.0
Draw the normal curve for the problem in
seconds. Find P(X < 18.6).
terms of X.
Translate X-values to Z-values.
Use the Cumulative Standardized Normal Table. X

18.0
18.6
Finding Normal Probabilities Solution: Finding P(Z < 0.12)
(continued)
Let X represent the time it takes, in seconds to download an image file
from the internet.
Suppose X is normal with a mean of 18.0 seconds and a standard
deviation of 5.0 seconds. Find P(X < 18.6): Standardized Normal Probability P(X < 18.6)
Table (Portion) = P(Z < 0.12)
X μ 18.6 18.0
Z 0.12 Z .00 .01 .02
σ 5.0 0.5478
0.0 .5000 .5040 .5080
μ = 18 μ=0
σ=5 σ=1 0.1 .5398 .5438 .5478
0.2 .5793 .5832 .5871
Z
18 18.6 X 0 0.12 Z 0.00
0.3 .6179 .6217 .6255
0.12
P(X < 18.6) P(Z < 0.12)
Finding Normal Finding Normal

Upper Tail Probabilities Upper Tail Probabilities
(continued)
Now Find P(X > 18.6).
Suppose X is normal with mean 18.0 P(X > 18.6) = P(Z > 0.12) = 1.0 - P(Z ≤ 0.12)
and standard deviation 5.0. = 1.0 - 0.5478 = 0.4522
Now Find P(X > 18.6).
0.5478
1.000 1.0 - 0.5478
= 0.4522
X Z Z
18.0 0 0
18.6 0.12 0.12
Finding a Normal Probability
Between Two Values Solution: Finding P(0 < Z < 0.12)
Suppose X is normal with mean 18.0 and Standardized Normal Probability P(18 < X < 18.6)
standard deviation 5.0. Find P(18 < X < 18.6). Table (Portion) = P(0 < Z < 0.12)
= P(Z < 0.12) – P(Z ≤ 0)
Calculate Z-values: Z .00 .01 .02 = 0.5478 - 0.5000 = 0.0478
X μ 18 18 0.0 .5000 .5040 .5080 0.0478

Z 0 0.5000
σ 5
0.1 .5398 .5438 .5478
18 18.6 X
X μ 18.6 18 0 0.12 Z 0.2 .5793 .5832 .5871
Z 0.12
σ 5 P(18 < X < 18.6)
0.3 .6179 .6217 .6255 Z
= P(0 < Z < 0.12) 0.00
0.12
Probabilities in the Lower Tail Probabilities in the Lower Tail

(continued)
Suppose X is normal with mean 18.0 Now Find P(17.4 < X < 18):
and standard deviation 5.0. P(17.4 < X < 18)
Now Find P(17.4 < X < 18). = P(-0.12 < Z < 0) 0.0478
= P(Z < 0) – P(Z ≤ -0.12)
= 0.5000 - 0.4522 = 0.0478 0.4522
The Normal distribution is

symmetric, so this probability is
X 17.4 18.0 X
18.0 the same as P(0 < Z < 0.12). Z
17.4 -0.12 0
Given a Normal Probability Finding the X value for a
Find the X Value Known Probability (continued)
Example:
Let X represent the time it takes (in seconds) to
Steps to find the X value for a known
download an image file from the internet.
probability: Suppose X is normal with mean 18.0 and standard
1. Find the Z value for the known probability. deviation 5.0.
2. Convert to X units using the formula: Find X such that 20% of download times are less than
X.
0.2000
X μ Zσ
? 18.0 X
? 0 Z
Find the Z value for

20% in the Lower Tail Finding the X value
1. Find the Z value for the known probability
2. Convert to X units using the formula:
Standardized Normal Probability 20% area in the lower
Table (Portion) tail is consistent with a X μ Zσ
Z … .03 .04 .05 Z value of -0.84.
18.0 (0.84)5.0
-0.9 … .1762 .1736 .1711
13.8
0.2000
-0.8 … .2033 .2005 .1977
-0.7 … .2327 .2296 .2266 So 20% of the values from a distribution
X
with mean 18.0 and standard deviation
? 18.0
-0.84 0 Z 5.0 are less than 13.80.
Excel (left), JMP (right), & Minitab (bottom) Templates
For Computing Cumulative Normal Probs.
Evaluating Normality
X is normal with a mean of 7 and a standard deviation of 2 find:
Not all continuous distributions are normal.

It is important to evaluate how well the data set is
approximated by a normal distribution.
Normally distributed data should approximate the
theoretical normal distribution:
The normal distribution is bell shaped (symmetrical)
where the mean is equal to the median.
The empirical rule applies to the normal distribution.
The interquartile range of a normal distribution is 1.33
standard deviations.
Evaluating Normality Evaluating Normality

(continued) (continued)
Comparing data characteristics to theoretical Comparing data characteristics to theoretical
properties: properties:
Construct charts or graphs: Observe the distribution of the data set:
For small- or moderate-sized data sets, construct a stem-and-leaf Do approximately 2/3 of the observations lie within mean ±1
display or a boxplot to check for symmetry. standard deviation?
For large data sets, does the histogram or polygon appear bell- Do approximately 80% of the observations lie within mean
shaped? ±1.28 standard deviations?
Do approximately 95% of the observations lie within mean ±2
Compute descriptive summary measures
standard deviations?
Do the mean, median and mode have similar values?
Evaluate normal probability plot:
Is the interquartile range approximately 1.33σ?
Is the normal probability plot approximately linear (i.e. a straight
Is the range approximately 6σ?
line) with positive slope?
Constructing The Normal Probability Plot
A Normal Probability Plot Interpretation
Normal probability plot: A normal probability plot for data

Arrange data into ordered array. from a normal distribution will be
approximately linear.
Find corresponding standardized normal quantile
values (Z). X
90
Plot the pairs of points with observed data values (X)
on the vertical axis and the standardized normal 60
quantile values (Z) on the horizontal axis.
30
Evaluate the plot for evidence of linearity.
-2 -1 0 1 2 Z
Normal Probability Plot Evaluating Normality: Mutual Fund Returns

(continued)
Interpretation Boxplots For Returns: Excel (top), JMP (left), & Minitab (right)
Nonlinear plots indicate a deviation from normality.
Left-Skewed Normal Right-Skewed
The boxplot appears slightly left-skewed.

(The normal distribution is symmetric.)
Evaluating Normality: Mutual Fund Returns Evaluating Normality: Mutual Fund Returns
(continued) (continued)
Distribution is approximately normal, or at most, slightly left-skewed Excel, JMP, & Minitab normal probability plot for returns
• The mean (7.91) is approximately the same as the median (8.09).

(In a normal distribution the mean and median are equal.)
• The boxplot is slightly left-skewed. (Normal Distribution is
symmetric.
• The interquartile range of 3.72 is approximately 1.23 standard
deviations. (In a normal distribution the interquartile range is 1.33
standard deviations.)
• The range of 18.72 is equal to 6.21 standard deviations. (In a
normal distribution the range is 6 standard deviations.)
• 68.75% of the observations are within 1 standard deviation of the
mean. (In a normal distribution this percentage is 68.26%.)
• 79.38% of the observations are within 1.28 standard deviations of
the mean. (In a normal distribution this percentage is 80%.)
• 94.58% of the observations are within 2 standard deviations of the
mean. (In a normal distribution this percentage is 95.44%.)
• The skewness statistic is -0.33 and the kurtosis statistic is 0.42. Plot is close to a straight line and shows the distribution is approximately
(In a normal distribution, each of these statistics equals zero.) normal. (A normal distribution appears as a straight line.)
Chapter Summary
In this chapter we discussed:
Computing probabilities from the normal distribution.
Using the normal distribution to solve business
problems.
Using the normal probability plot to determine whether a
set of data is approximately normally distributed.
ALWAYS LEARNING Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide 43

Chapter 6 Business Statistics

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Objectives

Chapter 6 In this chapter, you learn:

The Normal Distribution

 The formula for the normal probability density function is:

 To compute normal probabilities need to

The Standardized The Standardized Normal

Values below the mean have negative Z-values.

 If X is distributed normally with mean of 100

General Procedure for

 Translate X-values to Z-values.

 Use the Cumulative Standardized Normal Table. X

Finding Normal Finding Normal

X μ 18  18 0.0 .5000 .5040 .5080 0.0478

Probabilities in the Lower Tail Probabilities in the Lower Tail

The Normal distribution is

Find the Z value for

 Not all continuous distributions are normal.

Evaluating Normality Evaluating Normality

 Normal probability plot: A normal probability plot for data

Normal Probability Plot Evaluating Normality: Mutual Fund Returns

Nonlinear plots indicate a deviation from normality.

Left-Skewed Normal Right-Skewed

The boxplot appears slightly left-skewed.

• The mean (7.91) is approximately the same as the median (8.09).

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The formula for the normal probability density function is:

To compute normal probabilities need to

If X is distributed normally with mean of 100

Translate X-values to Z-values.

Use the Cumulative Standardized Normal Table. X

X μ 18 18 0.0 .5000 .5040 .5080 0.0478

Not all continuous distributions are normal.

Normal probability plot: A normal probability plot for data