CHAP1 - “Mean and Variance of a Discrete

Random Variable” MOD3

Last Edited @February 9, 2022 9:36 AM

Class SHS_STAT 🔢
Week 2

Population mean (μ)

a parameter or population characteristic that describe

μ = ∑[X ∗ P (X)]
the center of common data in the distribution

Population variance (σ 2 )

a parameter that measures the average squared

σ 2 = ∑[(X − μ)2 ∗ P (X)]
distance of deviation of each item in the data from the
mean.

Population standard deviation (σ )

measures how spread out the values in a data et are

σ= σ 2 /σ = variance
around the mean. More precisely it is a measure of the
average distance between the values of the data in the
set and the mean

Example 1.

A young professional wishes to venture into some

Investment Plan ROI in thousand (X) Probability P(X)
investments. Two banks offered an investment plan which
10 0.2
indicates the return on on investment (ROI) for a period of 5
20 0.2
years. In addition, the probabilities associated with each
ROI’s are provided in the table: Plan A (Bank A) 30 0.2
40 0.2

50 0.2
Question: Which plan should this professional invest in?
30 0.2

30 0.2
Plan B (Bank B) 30 0.2
30 0.2
30 0.2

Solution to Example 1.

μ = ∑[X ∗ P (X)]

CHAP1 - “Mean and Variance of a Discrete Random Variable” MOD3 1

 Investment Plan ROI in thousand (X) Probability P(X) X ∗ P (X)
10 0.2 2
20 0.2 4
Plan A (Bank A) 30 0.2 6

40 0.2 8
50 0.2 10

30 0.2 6
30 0.2 6
Plan B (Bank B) 30 0.2 6

30 0.2 6
30 0.2 6

For Plan A: For Plan B:

μ = ∑[X ∗ P (X)] μ = ∑[X ∗ P (X)]

μ = 2 + 4 + 6 + 8 + 10 μ=6∗5
μ = 30 μ = 30

Since both have the same conclusion, use population variance in order to see which investment is better

σ 2 = ∑[(X − μ)2 ∗ P (X)]

Investment Plan ROI in thousand (X) Probability P(X) X ∗ P (X) (X − μ) (X − μ)2 (X − μ)2 ∗ P (X)
10 0.2 2 10 - 30 = -20 (-20)^2 = 400 400(0.2) = 80
20 0.2 4 20 - 30 = -10 (-10)^2 = 100 100(0.2) = 20

Plan A (Bank A) 30 0.2 6 30 - 30 = 0 (0)^2 = 0 0(0.2) = 0

40 0.2 8 40 - 30 = 10 (10)^2 = 100 100(0.2) = 20

50 0.2 10 50 - 30 = 20 (20)^2 = 400 400(0.2) = 80

30 0.2 6 30 - 30 = 0 (0)^2 = 0 0 * 0.2 = 0
30 0.2 6 30 - 30 = 0 (0)^2 = 0 0 * 0.2 = 0
Plan B (Bank B) 30 0.2 6 30 - 30 = 0 (0)^2 = 0 0 * 0.2 = 0

30 0.2 6 30 - 30 = 0 (0)^2 = 0 0 * 0.2 = 0

30 0.2 6 30 - 30 = 0 (0)^2 = 0 0 * 0.2 = 0

Bank A: Bank B:

σ 2 = 200 σ2 = 0
SD = σ = 200 = 14.1421 SD = σ = 0=0

Interpretation:

the average ROI is the same in both plans

Plan B has zero variability

Plan B may be the characterized as a “consistent” or “stable” plan

The lesser the variability the better

Example 2.

CHAP1 - “Mean and Variance of a Discrete Random Variable” MOD3 2

 The arrival of customers during randomly chosen 10-min intervals at a drive-in facility specializing in phone development and
fil sales has been found to follow the probability distribution in the table below. Calculate the expected number of arrivals for
10-min intervals and the standard deviation.

Number of Arrivals (X) Probability (X) X ∗ P (X) (X − μ) (X − μ)2 (X − μ)2 ∗ P (X)

0 0.15 0 0 - 2 = -2 (-2)^2 = 4 4 * 0.15 = 0.6
1 0.25 0.25 1 - 2 = -1 (-1)^2 = 1 1 * 0.25 = 0.25
2 0.25 0.50 2-2=0 (0)^2 = 0 0 * 0.25 = 0
3 0.20 0.60 3-2=1 (1)^2 = 1 1 * 0.20 = 0.2

4 0.10 0.40 4-2=2 (2)^2 = 4 4 * 0.10 = 0.4

5 0.05 0.25 5-2=3 (3)^2 = 9 9 * 0.05 = 0.45

Mean:

μ = ∑[X ∗ P (X)]
μ = 0 + 0.25 + 0.50 + 0.60 + 0.40 + 0.25
μ=1

σ 2 = 1.9
SD = σ = 1.9 = 1.3784

Expected Value (Expectation) E(X)

Another concept related to the mean for a probability distribution is that of expected value or expectation.

E(X) is used in various types of games of chance, in insurance, and in other areas, such as decision theory

The expected value of a discrete random variable of a probability distribution is the theoretical average of the variable. The
formula is

μ = E(X) = ∑[X ∗ P (X)]

The formula for the expected value is the same as the formula for the theoretical mean. The expected, then, is the theoretical
mean of the probability distribution.

When expected value problems involve money, it is customary to round the answer to the nearest cent/centavo.

Example 3.

You’re at a carnival and you see a game. For P2 you roll a standard six-sided die. If the number showing is a six you win P10,
otherwise you win nothing. If you’re trying to make money, is it in your interest to play the game.

Gain or Loss (X) P (X) X ∗ P (X)

10 - 2 = 8 1/6 = 0.1667 1.33
0 - 2 = -2 5/6 = 0.8333 -1.67

E(X) = ∑[X ∗ P (X)] = −0.34

CHAP1 - “Mean and Variance of a Discrete Random Variable” MOD3 3

 Example 4.

Now suppose that the carnival game has been modified slightly. For the same entry fee of P2, if the number showing is a six
then you win P12, otherwise you win nothing.

Sample Space Gain or Loss (X) P (X) X ∗ P (X)

6 or n(S) = 1 12 - 2 = 10 1/6 = 0.1667 1.67
1 - 5 or n(S) = 5 0 - 2 = -2 5/6 = 0.8333 -1.67

E(X) = ∑[X ∗ P (X)] = 0

Example 6.

A car insurance company offers to pay P500,000 if a car is stolen or is destroyed beyond repair. The insurance policy costs
P24,000 and the probability that the company will need to pay the amount of insurance is 0.002. Find the expected value of
the insurance to car owners

Gain or Loss (X) P (X) X ∗ P (X)

500,000 - 24,000 = 476,000 0.002 952

24,000 0.998 -23,952

E(X) = ∑[X ∗ P (X)] = P hP − 23, 000

The negative expected value shows that the policy is designed to the advantage of the insurance company, but car owners
still buy these insurance policies because the security it provides in the event of a loss is worth the cost to them.

Example 7.

A local club plans to invest P10000 to host a baseball game. They expect to sell tickets worth P15000. But if it rains on the
day of the game, they won’t sell any tickets and the club will lose all the money invested. If the weather forecast for the day of
game is 20% possibility of rain, is this a good investment?

Gain or Loss (X) P (X) X ∗ P (X)

15000 - 10000 = 5000 0.8 4000
-10000 0.2 -2000

E(X) = ∑[X ∗ P (X)] = P hP 2, 000

Example 8.

A company makes electronic gadgets. One out of every 50 gadgets is faulty, but the company doesn’t know which ones are
faulty until a buyer complains. Suppose the company makes a $3 profit on the sale of any working gadget, but suffers a loss
of $80 for every faulty gadget because they have to repair the unit. Check whether the company can expect a profit in the
long term.

Gain or Loss (X) P (X) X ∗ P (X)

-80 1/50 = 0.02 -1.6

3 49/50 = 0.98 2.94

E(X) = ∑[X ∗ P (X)] = 1.34

Example 9.

CHAP1 - “Mean and Variance of a Discrete Random Variable” MOD3 4

 A game consists of drawing one card from a deck of cards. If the card drawn is a face card (jack, queen, or king), the player
wins P100. Otherwise he loses P30. Determine if the game is fair.

Gain or Loss (X) P (X) X ∗ P (X)

100 12/52 = 0.2308 23.08
-30 40/52 = 0.7692 -23.08

E(X) = ∑[X ∗ P (X)] = 0

CHAP1 - “Mean and Variance of a Discrete Random Variable” MOD3 5