Lecture 5.

DISCRETE PROBABILITY
▪ Random Variable
▪ Probability Distribution
▪ Expected value
▪ Variance – Standard Deviation
▪ Bivariate Probability
▪ Binomial Distribution
▪ Poisson Distribution

▪ [1] Chapter 5: pp.215 - 260

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 5.1. Random Variable
▪ Random variable: numerical value from a random
experiment.
▪ Denoted by X, Y, Z, or X1, X2,...
▪ Ex. Tossing a die, X is the number of dots
- Number of boys in a 3-children family
- Score of students’ exam
- Temperature during a day
- Interest rates of an interval of time

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 Types of Random Variable
▪ Variable 𝑋, value is random
▪ Discrete variable: 𝑋 = (𝑥1 , 𝑥2 , … , 𝑥𝑛 )
• Number of item: 𝑋 = (0, 1, 2, … )
• Score of test: 𝑋 = (0, 1, 2, … , 100)
• (𝑋 = 𝑥𝑖 ) is a random event
▪ Continuous variable: 𝑋 = (𝑥𝑚𝑖𝑛 ; 𝑥𝑚𝑎𝑥 )
• Time
• Temperature
• Length, Weight
• 𝑎 < 𝑋 < 𝑏 , 𝑎 < 𝑋 , 𝑋 < 𝑏 are random events

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 5.2. Discrete Probability Distribution
▪ Discrete: 𝑋 = (𝑥1 , 𝑥2 , … , 𝑥𝑛 )
▪ Denote: 𝑃 𝑋 = 𝑥𝑖 = 𝑝𝑖
Value 𝒙𝟏 𝒙𝟐 … 𝒙𝒏
Probability 𝑝1 𝑝2 … 𝑝𝑛

▪ Property: σ𝑛𝑖=1 𝑝𝑖 = 1
▪ 𝑃 𝑎 ≤ 𝑋 ≤ 𝑏 = σ𝑎≤𝑥𝑖 ≤𝑏 𝑝𝑖
▪ 𝑝𝑖 is discrete probability distribution; probability mass
function

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 Example
Ex. Probability distribution of X, which is the number of
Heads when flipping a coin twice
𝑋 = {0, 1, 2} p Flip a coin twice

𝑋 0 1 2
𝑃 1 2 1 𝑿
4 4 4
Example 5.1. Number of Heads when flipping a coin
triples
X 0 1 2 3
Probability
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 5.3. Parameter
▪ Parameter of Random variable:
▪ Expected value (Mean)
▪ Variance, Standard Deviation
▪ Ex.

Salary ($) 7 8 9
Frequency 2 5 3
Percent 20% 50% 30%
Probability 0.2 0.5 0.3

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 Expected Value
▪ Expected value of X, denoted by E(X) or μX
𝑬 𝑿 = 𝝁𝑿 = σ𝒊 𝒙𝒊 𝒑𝒊
▪ Expected value of 𝑋 is also Population Mean, has the
same unit with 𝑋.
▪ Properties: if 𝑐 is a constant
𝐸(𝑐) =𝑐
𝐸(𝑋 + 𝑐) = 𝐸(𝑋) + 𝑐
𝐸(𝑐𝑋) = 𝑐𝐸(𝑋)
𝐸(𝑋 ± 𝑌) = 𝐸(𝑋) ± 𝐸(𝑌)

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 Variance – Standard Deviation
▪ Variance of 𝑋 is denoted by 𝑉(𝑋) or 𝑉𝑎𝑟(𝑋) or 𝜎𝑋2
𝟐
𝑽 𝑿 =𝑬 𝑿−𝑬 𝑿 = σ𝒏𝒊=𝟏 𝒙𝒊 − 𝝁𝑿 𝟐 𝒑𝒊
Unit of Variance equals square of X’s unit

▪ Standard Deviation of 𝑋 is denoted by 𝜎(𝑋) or 𝜎𝑋

𝝈 𝑿 = 𝑽(𝑿)
Unit of Variance is unit of 𝑋

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 Comparison
Example 5.1. Compare rate of return with three projects
Project RR (%) 7
A Probability 1

Project RR (%) 5 15
B Probability 0.5 0.5

Project RR (%) –10 10 24

C Probability 0.2 0.3 0.5

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 Properties of E(X) and V(X)
▪ 𝑋, 𝑌 are variable; 𝑐 is constant
Expected Value Variance
𝐸 𝑐 =𝑐 𝑉 𝑐 =0
𝐸 𝑋+𝑐 =𝐸 𝑋 +𝑐 𝑉 𝑋+𝑐 =𝑉 𝑋
𝐸 𝑐×𝑋 =𝑐×𝐸 𝑋 𝑉 𝑐 × 𝑋 = 𝑐2 × 𝑉 𝑋
𝐸 𝑋 ± 𝑌 = 𝐸 𝑋 ± 𝐸(𝑌) 𝑉 𝑋 ± 𝑌 =
𝑉 𝑋 + 𝑉 𝑌 ± 2𝐶𝑜𝑣(𝑋, 𝑌)
𝑉 𝑋±𝑌 =𝑉 𝑋 +𝑉 𝑌
If 𝑋 and 𝑌 are independent

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 Investment
Example 5.3. There are 4 independent projects, all of
them have the same probability distribution for return
rate:
Return rate (%) 0 20
Probability 0.3 0.7

▪ Compute Expected value and Variance when:

(a) Invest 10 ($ mil.) in one project
(b) Invest 40 ($ mil.) in one project
(c) Invest in 4 projects, each 10 ($ mil.)

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 5.4. Bivariate Probability
Example 5.5. Profit of Project 1 and 2 are 𝑋 and 𝑌,
respectively, with Bivariate Probability table:

X Y –1 0 5 
–2 0.05 0.1 0.05
7 0.05 0.2 0.55
 1
▪ Fill the blanks
▪ 𝐸 𝑋 , 𝑉 𝑋 , 𝐸 𝑌 , 𝑉 𝑌 , 𝐸 𝑋 + 𝑌 , 𝑉(𝑋 + 𝑌)?

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 Covariance and Correlation
▪ Covariance
𝐶𝑜𝑣 𝑋, 𝑌 = 𝐸 𝑋𝑌 − 𝐸 𝑋 𝐸 𝑌
= σ𝑌 σ𝑋 𝑥. 𝑦. 𝑝𝑋𝑌 − 𝐸 𝑋 𝐸(𝑌)

▪ 𝑉 𝑋 ± 𝑌 = 𝑉 𝑋 + 𝑉 𝑌 ± 2𝐶𝑜𝑣(𝑋, 𝑌)
▪ 𝑉 𝑎𝑋 ± 𝑏𝑌 = 𝑎2 𝑉 𝑋 + 𝑏 2 𝑉 𝑌 ± 2𝑎𝑏𝐶𝑜𝑣(𝑋, 𝑌)

▪ Correlation
𝐶𝑜𝑣 𝑋, 𝑌
𝜌 𝑋, 𝑌 =
𝜎𝑋 𝜎𝑌
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 Porfolio
▪ Ex. Two investment projects A and B

Project A B % for A % for B 𝐸(𝑃) 𝝈(𝑷)

E(return) 10 20 100% 0% 10 5.00
90% 10% 11 4.54
𝜎(return) 5 12 80% 20% 12 4.45
70% 30% 13 4.76
▪ 𝐶𝑜𝑣 = −6 60% 40% 14 5.40
50% 50% 15 6.26
40% 60% 16 7.28
30% 70% 17 8.38
20% 80% 18 9.55
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 5.5. Binomial Distribution
▪ Bernoulli problem: 𝒏 independent trials/experiments,
probability of success for each trials is 𝒑.
▪ 𝑿 is number of successes
▪ 𝑿 has a Binomial Distribution: 𝑿~𝑩(𝒏, 𝒑)
𝑷 𝑿 = 𝒙 𝒏, 𝒑 = 𝑪𝒙𝒏 𝒑𝒙 𝟏 − 𝒑 𝒏−𝒙

▪ 𝑬 𝑿 = 𝒏𝒑
▪ 𝑽 𝑿 = 𝒏𝒑 𝟏 − 𝒑 ; 𝝈𝑿 = 𝒏𝒑(𝟏 − 𝒑)
▪ 𝒏𝒑 + 𝒑 − 𝟏 ≤ 𝒎𝟎 ≤ 𝒏𝒑 + 𝒑
▪ Case study 1 and 2

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 Binomial Distribution
Binomial Table (Table) n x P
… .20 …
3 0 .5120
1 .3840
2 .0960
Ex. 3 .0080
𝑃 𝑋 = 1 𝑛 = 3, 𝑝 = 0.2 = 0.384
𝑃(𝑋 = 6|𝑛 = 10, 𝑝 = 0.3) = 0.1029
𝑃(𝑋 = 4|𝑛 = 10, 𝑝 = 0.7) = 0.1029

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 Example
Example 5.6. The quiz includes 10 multiple-choices
questions, each has 4 options and only one correct. A
candidate do all questions by randomly select the
answers.
(a) Expectation and variance of the number of correct
answers?
(b) Probability that there are 3 correct answers?
(c) Probability that there are at least 6 correct ones?
(d) Each correct one is evaluated (+4) points, but for
incorrect one, it is (-1) point. What is the chance for
candidate gain 10 points in total ?
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 5.6. Poisson Distribution
▪ 𝑋 has a Poisson Distribution: 𝑋~𝑃(𝜆)
𝜆𝑥 𝑒 −𝜆
▪ 𝑃 𝑥 = 𝑥 = 0,1,2 …
𝑥!
▪ 𝐸 𝑋 = 𝜆 ; 𝑉 𝑋 = 𝜆 ; 𝜆 − 1 ≤ 𝑚0 ≤ 𝜆
▪ Binomial Distribution with large 𝑛 and small 𝑝 (that
𝑛𝑝 ≈ 𝑛𝑝(1 – 𝑝)) converges to Poisson Distribution,
with  = 𝑛𝑝 or  = the number or appearances in an
interval of time.
Ex. The number of mistake papers of a photo machine in
one day is Poisson distribution with mean of 3.
Find the probability that in the following day, there will
be 4 mistake papers
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 Poisson Distribution – Table
x 𝜆 𝜇
Ex. 𝑋~𝑃(𝜆 = 3) … 3.0 …
34 𝑒 −3 0 .0498
𝑃 𝑥=4𝜆=3 = = 1 .1494
4!
2 .2240
3 .2240
Using Table 7 (p.995), 𝝀 = 𝝁 4 .1680
𝑃 𝑥=4𝜆=3 = 5 .1008
… …
Example 5.7. The probability that a passenger forgets his
(her) luggage on train is 0.008. What the probability that
in 400 passengers, there is
(a) No one forgot luggage.
(b) At least 4 passengers forgot their luggage.
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 Key Concepts
▪ Random Variable
▪ Discrete Variable
▪ Probability Distribution
▪ Expected Value
▪ Variance, Standard Deviation
▪ Bivariate Probability Distribution
▪ Covariance
▪ Binomial Distribution, Poisson Distribution

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 Exercise
[1] Chapter 5:
▪ (227) 16, 20, 21, 22
▪ (237) 25, 26, 28
▪ (248) 32, 35, 38,
▪ (253) 46, 48, 51,
▪ (260) 60, 66, 67,

▪ Case Study : Martin Clothing Store Problem with 10

customers

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