BFS1024

Statistics for Finance

Topic 4: DISCRETE
PROBABILITY
DISTRIBUTION

Chap 4-1
 Important Discrete
Probability Distributions

Discrete Probability
Distributions

Binomial Poisson

Chap 4-2
 Binomial Probability Distribution
 Trials are identical
 e.g.: 15 tosses of a coin; ten light bulbs taken from

a warehouse
 Two mutually exclusive outcomes on each trials
 e.g.: Head or tail in each toss of a coin; defective

or not defective light bulb

 Trials are independent
 The outcome of one trial does not affect the

outcome of the other

Chap 4-3
 Binomial Probability Distribution
 Constant probability for each trial
 e.g.: Probability of getting a tail is the same each

time we toss the coin

Chap 4-4
 Applications of the
Binomial Distribution
 A manufacturing plant labels items as either
defective or acceptable
 A firm bidding for contracts will either get a
contract or not
 A marketing research firm receives survey
responses of “yes I will buy” or “no I will
not”
 New job applicants either accept the offer or
reject it
 Your team either wins or loses the football
game at the company picnic
Chap 4-5
 Binomial Probability
Distribution Function
X ~ B(n, p)
nr
P( X  r ) Cr p (1  p)
n r

P(X = r) : probability of r successes given n and p

X : number of successes in sample
p : the probability of each success
n : sample size

Chap 4-6
 Example 1

What is the probability of one success in five observations

if the probability of success is .1?
X ~ B (n = 5, p = .1)

X is said to P(X  1 )  nC x p x q n  x
follow a
Binomial  5C1(.1 )1( 1  .1 )51
distribution
with 5 trials &  ( 5 )(.1 )(.9 )4
probability of
success is  .3281
10%.
 Example 2

Suppose the probability of purchasing a defective computer

is 0.02. What is the probability of purchasing 2 defective
computers is a lot of 10?
X ~ B (n = 10, p = .02)

X is said to P(X  2 )  nC x p x q n  x
follow a
Binomial  10C2(.02 )2( 1  .02 )102
distribution
with 10 trials  ( 45 )(.0004 )(.8508 )
& probability
 .01531
of success is
2%.
 Binomial : Class Exercise

If n=5 and p=0.40, what is the probability that:

a) X = 4

b) X ≤ 3

c) X < 2

d) X > 1
 Binomial Distribution
Characteristics

Mean :   E  X   np

Variance :   np 1  p 
2

Standard Deviation:   np 1  p 

Chap 4-10
 Example 3
The Department of Labor reports that 20% of the
workforce in Selangor is unemployed and interviewed
14 workers.

What is the P ( X  3) 14C 3 (.20) 3 (1  .20)11

probability that
 (364)(. 0080)(. 0859)
exactly three are
unemployed?  .2501

Chap 4-11
 Continued ……

At least three are P( X  3)14C3 (.20)3 (.80)11  ...14C14 (.20)14 (.80) 0

unemployed?
 .250  .172  ...  .000  .551

What is expected
number of
unemployed people E ( X )  np  100 (0.20)  20 people
if they interviewed
100 people ?
Chap 4-12
 Poisson Distribution
 Poisson Process:
 It is distributed over “time” and “space”.

 Describes the number of times some event

occurs during a specified interval.

 The probability of success is independent from

interval to interval
 e.g.: number of customers arriving in 15

minutes
 e.g.: number of defects per case of light

bulbs
Chap 4-13
 The Poisson Distribution
Properties
Apply the Poisson Distribution when:

 You wish to count the number of times an event

occurs in a given area of opportunity

 The probability that an event occurs in one area of

opportunity is the same for all areas of opportunity

 The number of events that occur in one area of

opportunity is independent of the number of events
that occur in the other areas of opportunity
Chap 4-14
 The Poisson Distribution
Properties
 The probability that two or more events occur in
an area of opportunity approaches zero as the area
of opportunity becomes smaller

 The average number of events per unit is 

(lambda)

Chap 4-15
 Poisson Probability
Distribution Function
X ~ P ( )

e  X
P X  
X!
P  X  : probability of X "successes" given 
X : number of "successes" per unit
 : expected (average) number of "successes"
e : 2.71828 (base of natural logs)
Chap 4-16
 Poisson Distribution
Characteristics
 Mean
E( X )  

 Variance and Standard Deviation

 2
  

The value of  will change when the time or

space interval change.
Chap 4-17
 Example 4
Automobiles arrive at Sunway Toll at the rate of two
per minute. What is the probability that no automobiles
arrive in a particular minute?

X ~ P (  2 per minute)
e   X
P(X) 
X!
2 0
e (2 )
P( X  0)   0.1353
0!
Chap 4-18
 Example 5
 Suppose that, on average, 5 cars enter a parking lot
per minute. What is the probability that in a given
minute, 7 cars will enter?

X ~ P ( = 5 cars per minute)

e  λ λ x e 5 57
P(X  7 )    0.104
X! 7!

 So, there is a 10.4% chance 7 cars will enter the

parking in a given minute.
 Example 6
 Suppose that, on average, 5 cars enter a parking lot
per minute. What is the probability that in a 20 cars
will enter in 5 minutes?

Y ~ P ( = 5 cars/min × 5 mins = 25 cars)

e  λ λY e 25 2520
P(Y  20 )    0.0519
Y! 20!

 So, there is a 5.19% chance 20 cars will enter the

parking in 5 minutes.
 Class Exercise
Suppose the number of accidents occurring in an
industrial plant has an average of 1.5 accidents every
three months. During the first three months of this
year, four accidents occurred.
a) Find the probability that no accidents will occur during the second
three-month period.
b) Find the probability that fewer accidents will occur in the second
three-month period than that which occurred during the first three-
month period.
c) Find the probability that less than 7 accidents will occur in the
first nine months of this year.