Chapter 4 : Normal Distribution

4.1 Characteristic of normal distribution

The normal distribution is a specific example of a continuous probability distribution, with many
important applications in statistics and finance. Many ‘real world’ populations are believed to
conform to the normal distribution.

We write X ~ N(x,  2x ) where x and  x , are the mean and variance of the distribution of X.
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When working with the random variable X ~ N(x,  x ), it is often useful to define the related
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random variable, Z, as follows:

X − x
Z=
x

If a random variable, X, has a probability density function that is symmetrical and bell-shaped
with certain restrictions placed on the precise shape of the bell-curve, X is said to follow the
normal distribution.

• A normal distribution curve is bell-shape.

• The mean, median and mode are equal and located at the center of the distribution.
• A normal distribution curve is unimodal.
• The curve is symmetrical about the mean.
• The curve is continuous, that is there are no gaps or holes.
• The curve never touches the x- axis. (asymptotic)
4.2 The Standard normal distribution

The random variable Z follows the standard normal distribution. Z has a mean of 0 and variance
of 1  Z ~ N(0,1).

There is a direct correspondence between probabilities for X and probabilities for Z:

x − x
P(X ≤ x) = P(Z ≤ z), where z =
x

Probabilities for the standard normal distribution (Z) are available from statistical tables. We can
use the tables to evaluate probabilities for any normal random variable (X), simply by standardizing
(converting X to Z) and then looking up the required probability.
4.3 Area under a normal curve

Probability of z-score.

Use table 1(a) to find the answer.

The table 1(a) the Probability z is always P(Z>z).

Thus,
If P(Z < z) = 1 – P (Z>z)
If P(Z > -z) = 1 – P (Z>z)
If P(Z < -z) = 1– [1– P (Z>z)]
Example 1

Find the area under the normal curve between z = 0 and z = 1.95.

The area between z = 0 and z = 1.95 can be interpreted as the probability that z assumes a value
between 0 and 1.95; that is,

P(0 < z < 1.95) = 0.4744

P(z = 0) = 0.5000 and P(z = 1.95) = 0.0256

Therefore the area under the standard normal distribution between 0 and 1.95 is 0.5-0.0256
= 0.4744

Example 2

Find the following areas under the standard normal curve.

a) Area to the right of z = 2.32

b) Area to the left of z = -1.54
c) Area to the right of z = -2.05
Solution:
Example 3

Find the following probabilities for the standard normal curve:

a) P(1.19 < z < 2.12)

b) P(-1.56 < z < 2.31)
c) P(-1 < z < -0.5)
d) P(z > -1.75)
e) P(z < -2.35)

Solution:

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Exercise

1) Intelligence quotients (IQs) measured on the Stanford Revision of the Binet-Simon Intelligence
Scale are normally distributed with a mean of 100 and a standard deviation of 16. Determine the
percentage of people who have IQs between 115 and 140.

2) Anticipated consumer demand for certain product next month can be represented by a
normal distribution with mean 1200 units, and standard deviation 100 units. What is the
probability that sales will exceed 1000 units?

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 The zα Notation

The symbol zα is used to denote the z-score that has an area of α to its right under the
standard normal curve.

Example 4

Use Table 1(b) to

find

a) Z 0.025
b) Z 0.05

Solution