SME11e - PPT - ch07 STD

Slides by:
Andrew Stephenson
Georgia Gwinnett College
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Chap. 7 Random Variables and Discrete
Probability Distributions 7.2
• Random Variables(확률변수) and Probability Distributions(확률분포)
• Bivariate Distributions (이변수 분포)
• Applications in Finance
• Binomial Distribution (이항분포)
• Poisson Distribution (포와송분포)
* Chapter opening example will be discussed in the slides 7.70-7.78
7-1 Random Variables and Probability
Distributions… 7.3
• Example: Consider an experiment where we flip two balanced
coins and observe the results.
• Then the sample space 𝑆 = { 𝐻, 𝐻 , 𝐻, 𝑇 , 𝑇, 𝐻 , (𝑇, 𝑇)}.
• The number of heads is called the random variable, and Let
𝑋(∙) be the number of heads.
𝑋 (𝑇, 𝑇) = 0, 𝑋 (𝐻, 𝑇) = 𝑋 𝑇, 𝐻 = 1, 𝑋 (𝐻, 𝐻) = 2
• 𝑃 𝑋 = 𝑥 is the sum of probabilities of the sample points that
are assigned the value of 𝑥. So,
𝑃 𝑋 = 0 = 1/4, 𝑃 𝑋 = 1 = 1/2, 𝑃 𝑋 = 2 = 1/4
Random Variables…
7.4
• Example: In many parlor games as well as the games of craps
played in casinos, the player tosses two fair dice. Then the
sample space is:
𝑆 = { 𝑖, 𝑗 : 𝑖 = 1,2, … , 6; 𝑗 = 1,2, … , 6}
= { 1, 1 , 1, 2 , … , 1, 6 ,
⋮
6, 1 , 6, 2 , … , (6, 6)}
• In almost all games, the player is primarily interested in the total.
If we define the random variable X as the total of the two dice,
then X can be denoted as follows:
𝑋 ∙ = 𝑋 𝑖, 𝑗 = 𝑖 + 𝑗, 𝑖 + 𝑗 = 2,3, … , 12
Random Variables…
7.5
• Definition 7.1 (Random Variable:확률변수) A random variable is
a function or rule that assigns a number to each outcome of
an experiment.
• A real-valued function defined over a sample space.
• A function from S to a set of real numbers, dented by
𝑋 ∙ ,𝑌 ∙ ,𝑍 ∙ ,…
• Alternatively, the value of a random variable is a numerical
event.
Random Variables…
7.6
• To each point in the sample space S, we will assign a real
number denoting the value of the variable X.
• The sample space S can be partitioned into subsets so that
each point in a subset are all assigned the same values of X.
• These subset are mutually exclusive since no point is
assigned two different numerical values.
Random Variables…
7.7
• Example: The experiment consists of rolling a fair die.
• Then the sample space 𝑆 = {1, 2, 3, 4, 5, 6}.
• Let 𝐴1 and 𝐴2 be a partition of S such that
𝐴1 = {1,3,5}, 𝐴2 = (2,4,6}
• Let 𝑋(∙) be a random variable:
𝑋 𝑒 = 𝑥1 = 0 if 𝑒 ∈ 𝐴1 (𝑡ℎ𝑎𝑡 𝑖𝑠, 𝑖𝑓 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑝𝑜𝑡𝑠 𝑖𝑠 𝑜𝑑𝑑. )
𝑋 𝑒 = 𝑥2 = 1 if 𝑒 ∈ 𝐴2 (𝑡ℎ𝑎𝑡 𝑖𝑠, 𝑖𝑓 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑝𝑜𝑡𝑠 𝑖𝑠 𝑒𝑣𝑒𝑛. )
Event Characteristics Random

Variable
Partition 𝐴1 The number of spot is odd. 𝑋 𝑒 = 𝑥𝑖 0
𝐴2 The number of spot of even. 1
Two Types of Random Variables…
7.8
• Definition 7.2 (Discrete Random Variable: 이산확률변수)
• A random variable 𝑋 is said to be discrete if it takes on a
countable number of values.
• Examples:
• The number of heads observed in an experiment flipping a coin
10 times. The values of 𝑋 are 0, 1,2,…., 10.
• A random variable X as the totals of the two dice, then the
values of X are 2, 3, 4, …, 12.
• Countable! So X is discrete.
Two Types of Random Variables…
7.9
• Definition 7.3 (Continuous Random Variable: 연속확률변수)
• A continuous random variable is one whose values are

uncountable.
• Examples:
• Let X = time to write a statistics exam. Its time limit is 3 hours,
and students cannot leave before 30 minutes.
• The smallest value of X is 30 minutes. If we attempt to count the
number of values that X can take on, we need to identify the
next value: 30.1 minutes? 30.10000001 minutes?
• We cannot identify the second, or third, or any other values of X.
Not countable!! So X is continuous.
• Other examples: The amount of time to complete a job (to
assemble a computer): the lifetime of a car, …
Probability Distributions(확률분포)…
7.10
• Definition 7.4 (A Probability Distribution:확률분포)
• A probability distribution is a table, formula, or graph, that
describes the values of a random variable and the probability
associated with these values.
• A list of all possible 𝑥𝑖 , 𝑃 𝑥𝑖 pairs of a random variable.
• Describes how probabilities are distributed over the
values of the random variable.
• We have two types of probability distributions:

• Discrete Probability Distribution (이산확률분포): chapter 7
• Continuous Probability Distribution (연속확률분포): Chapter 8
Probability Notation…
7.11
• Notation:
• An upper-case letter will represent the name of the
random variable, usually X.
• Its lower-case counterpart will represent the value of the
random variable
• 𝑋 = 𝑟𝑎𝑛𝑑𝑜𝑚 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒;
• 𝑥 𝑜𝑟 𝑥𝑖 = 𝑡ℎ𝑒 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑟𝑎𝑛𝑑𝑜𝑚 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒.
Probability Function…
7.12
• Definition 7.5 (Probability (Mass) Function (pmf): 확률질량함수)*
• For a discrete random variable 𝑋, the probability that 𝑋 takes

on the value 𝑥𝑖 , 𝑃 𝑋 = 𝑥𝑖 , probability function, is defined as
the sum of the probabilities of all sample points in 𝑆 that are
assigned the value 𝑥𝑖 .
• We will sometimes denote 𝑃 𝑋 = 𝑥𝑖 by 𝑃 𝑥𝑖 𝑜𝑟 𝑝(𝑥𝑖 ).
* For a continuous random variable 𝑋, we define the probability density function (pdf:
확률밀도함수), 𝑓(𝑥) ≥ 0. (see Chap. 8)
Probability Function…
7.13
• The required conditions for a discrete probability function are*:
1. 0 ≤ 𝑃 𝑥 ≤ 1 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑥
2. σ𝑎𝑙𝑙 𝑥 𝑃 𝑥 = 1
where the random variable can assume values x and P(x)
is the probability that the random variable is equal to x.
* 이산확률함수의 필수조건
Example 7.1 Probability Distribution of
Persons per Household 7.14
• The Statistical Abstract of the United States is published annually. It
contains a wide variety of information based on the census as well as
other sources to provide information about a variety of different aspects
of the lives of the country’s residents.
• One of the questions asks households to report the number of
persons living in the household. The following table summarizes the
data.
• Develop the probability distribution of the random variable defined as
the number of persons per household.
Example 7.1 Probability Distribution of Persons
per Household 7.15
# of Persons # of Households (Mil.)

1 31.1
2 38.6
3 18.8
4 16.2
5 7.2
6 2.7
7 or more 1.4
Total 116.0
• The probability of each value of X, the number of persons per

household, is computed as the relative frequency:
Example 7.1 Probability Distribution of Persons
per Household 7.16
• If we select one household at random, the probability that the
household has three persons is P(X=3) = .162
• What is the probability there are 4 or more persons in any given
household?
𝑃 𝑋 ≥4 =𝑃 4 +𝑃 5 +𝑃 6 X P(x)
+𝑃(7 𝑜𝑟 𝑚𝑜𝑟𝑒) 1 31.1/116.0 = .268
= .140 + .062 + .023 + .012 2 38.6/116.0 = .333
= .237∎
3 18.8/116.0 = .162
4 16.2/116.0 = .140
5 7.2/116.0 = .062
6 2.7/116.0 = .023
7 or more 1.4/116.0 = .012
1.000
Example 7.2… Probability Distribution of
the Number of Sales 7.17
• A mutual fund salesperson has arranged to call on three people

tomorrow. Based on past experience the salesperson knows that
there is a 20% chance of closing a sale on each call (각 전화에서 판매를
성사시킬 확률 20%).
• Determine the probability distribution of the number of sales the

salesperson will make.
• Let C denote success, i.e. closing a sale P(C)=.20

Thus F is not closing a sale, and P(F)=.80
• Use the probability rules and trees.
Example 7.2…
7.18
• Developing a Probability Distribution with tree…
Sales Call 1 Sales Call 2 Sales Call 3

(.2)(.2)(.8)= .032
P(C)=.2 CCC
P(C)=.2 X P(x)
P(F)=.8 CCF
P(C)=.2 CFC 3 .23 = .008
P(C)=.2
P(F)=.8 2 3(.032)=.096
P(F)=.8 CFF 1 3(.128)=.384
P(C)=.2 FCC
0 .83 = .512
P(F)=.8 P(C)=.2
P(F)=.8 FCF
P(C)=.2 FFC
P(F)=.8
P(F)=.8 FFF
P(X=2) is illustrated here…
Example 7.2… Probability Distribution of
the Number of Sales 7.19
• The tree exhibits each of the eight possible outcomes and their
probabilities:
• One outcome that represent no sale, and its probability is P(0)= .512
• Three outcomes representing one sale each with probability .128:
P(1) = 3(.128) = .384 …
• Probability Distribution of the Number of Sales:
𝑃 𝑥 = 𝐶𝑥3 (.2)𝑥 (.8)3−𝑥 x P(x)
where 𝑥 = 0, 1, 2, 3. 0 .512
1 .384
2 .096
3 .003
Example: Numbers of Heads
• Example: Flip a fair coin twice. Let 𝑋 be the number of heads.7.20
𝑆 = {𝐻𝐻, 𝐻𝑇, 𝑇𝐻, 𝑇𝑇} ⇒ 𝑋 𝐻𝐻 = 2, 𝑋 𝐻𝑇 = 𝑋 𝑇𝐻 = 1, 𝑋 𝑇𝑇 = 0
with 𝑃 𝐻𝐻 = 𝑃 𝐻𝑇 = 𝑃 𝑇𝐻 = 𝑃 𝑇𝑇 = 1/4
• Probability distribution:
1 1
• by formula: 𝑃 𝑥 = 𝐶𝑥2 ( )𝑥 ( )2−𝑥 , 𝑥 = 0, 1, 2
2 2
• by table: by graph:
P(x)
𝒙 𝑷(𝒙)
3/4
0 1/4
1 2/4 2/4
2 1/4 1/4
Total 1.0 𝑥
0 1 2
Example: Number of Heads
7.21
• Example: Toss a fair coin three times and 𝑋 is the number of heads.
Develop the probability distribution of 𝑋.
𝑆 = 𝐻𝐻𝐻, 𝐻𝐻𝑇, 𝐻𝑇𝐻, 𝑇𝐻𝐻, 𝐻𝑇𝑇, 𝑇𝐻𝑇, 𝑇𝑇𝐻, 𝑇𝑇𝑇
• By Table: By Graph:
𝒙 𝑷(𝒙)
3/8
0 1/8
1 3/8 2/8
2 3/8 1/8
3 1/8 𝑥
0 1 2 3
total 1.0
1 1
• By Formula: 𝑃 𝑥 = 𝐶𝑥3 ( )𝑥 ( )3−𝑥 , 𝑥 = 0, 1, 2, 3.
2 2
Example
7.22
• Example: A supervisor wants to choose two workers for a special job
from three men and three women. He decides to select the two
workers at random. Let 𝑋 denote the number of women in his
selection. Find the probability distribution for 𝑋.
𝑀 = 𝑚𝑎𝑛, 𝑊 = 𝑤𝑜𝑚𝑎𝑛; 𝑆 = {𝑀𝑀, 𝑀𝑊, 𝑊𝑀, 𝑊𝑊};
𝑋 𝑀𝑀 = 0, 𝑋 𝑀𝑊 = 𝑋 𝑊𝑀 = 1, 𝑋 𝑊𝑊 = 2
• By Table By Graph
P(x)
𝒙 𝑷(𝒙)
0 (3/6)(2/5)=1/5 3/5
1 (2)(3/6)(3/5)=3/5
2/5
2 (3/6)(2/5)=1/5
1/5
Total 1.0
𝑥
0 1 2
FYI: Hypergeometric Distribution (초기하분포)
7.23
• Definition 7.6 (Hypergeometric experiment) An experiment where
a sample of n items is taken without replacement from a finite population
of N items, each of which is classified as a success or a failure. (with
replacement, it’s binomial)
• Let k = # of successes and N−k = # of failures in the population.
• Let n = sample size w/o replacement
• Hypergeometric random variable X is the number of successes in a
hypergeometric experiment: 𝑋~𝐻𝐺(𝑛, 𝑘, 𝑁).
FYI: Hypergeometric Distribution (초기하분포)
7.24
• Definition 7.7 (Hypergeometric probability distribution) The
probability distribution of hypergeometric random variable X is
𝐶𝑥𝑘 𝐶𝑛−𝑥
𝑁−𝑘
𝑃 𝑥 = , 𝑓𝑜𝑟 𝑥 = 0, 1, 2, … , 𝑛
𝐶𝑛𝑁
3
𝐶𝑥3 𝐶2−𝑥
• Previous example: 𝑃 𝑥 = , 𝑓𝑜𝑟 𝑥 = 0, 1, 2, … , 𝑛
𝐶26
7-1c Describing the Population/Probability
Distribution … 7.25
• Probability distributions often represent population. Rather than
record each of the many observations in a population, we list the
values and their associated probabilities:
• In Example 7.1, the probability distribution of the population of
numbers of persons per household and their associated
probabilities.
• In Example 7.2, the probability distribution of the number of sales
made in three calls by the mutual fund salesperson and their
probabilities.
• We can describe the populations by computing various parameters

(the population mean and population variance,…).
Population Mean (Expected Value: 기대값)
7.26
• Definition 7.8 (Expected Value of 𝑋: )*
Let 𝑋 be a discrete random variable with the probability function 𝑝(𝑥𝑖 ).
Then the expected value of 𝑋, 𝐸(𝑋), is defined to be
𝐸 𝑋 = 𝜇 ≡ σ𝑛𝑖=1 𝑥𝑖 𝑃 𝑥𝑖
• Weighted average of the possible values that 𝑋 can take on: each
value being weighted by the probability that 𝑋 assumes that value.
• Interpretation: Long Run Average of Outcomes
* The mean (value) of 𝑋; the average of 𝑋; the mathematical expectation of 𝑋; the first
moment of 𝑋.
Population Variance…
7.27
• Definition 7.9 (Variance, Standard Deviation): The variance of a
random variable 𝑋 is defined to be the expected value of (𝑋 − 𝜇)2 .
That is,
2
𝑉 𝑋 = 𝜎2 ≡ 𝐸 𝑋−𝐸 𝑋 = 𝐸 𝑋 2 − [𝐸 𝑋 ]2
= σ𝑎𝑙𝑙 𝑥(𝑥 − 𝜇)2 𝑃(𝑥) = σ𝑎𝑙𝑙 𝑥 𝑥 2 𝑃(𝑥) − 𝜇2
• It is the weighted average of the squared deviations from the

mean.
• The standard deviation of 𝑋, 𝜎 is the positive square root of 𝑉(𝑋).

𝜎= 𝜎2
Example 7.3…
7.28
• Find the mean, variance, and standard deviation for the
population of the number of persons per household… (from
Example 7.1). Assume that the category “7 or more” is actually 7.
• Solution: (See the prob. distribution table in ppt 7.16)

• E(X) = 1∙P(1) + 2∙P(2) + … + 7∙P(7)
= 1∙(.268) + 2∙(.333) + 3∙(.162) + ⋯+ 6 ∙(.023) + 7 ∙(.012)
= 2.512 ∎
• 𝑉 𝑥 = (1 − .2.512)2 .268 + (2 − 2.512)2 .333 + ⋯
+(6 − 2.512)2 .023 + 7 − 2.512 2 .012
= 1.958∎
• 𝜎 = 1.958 = 1.398∎
7-1d Function of a Random Variable
7.29
• Sometimes we are interested in the expected value of a function of a
random variable 𝑋.
• Let 𝑋 be a discrete random variable with the probability function

𝑝(𝑥𝑖 ) and 𝑌 = 𝑔(𝑋) is a real-valued function of 𝑋. Then the
expected value of 𝑔(𝑋) is given by
𝐸𝑔 𝑋 = σ𝑛𝑖=1 𝑔(𝑥𝑖 ) ∙ 𝑃 𝑥𝑖
• Example: Let 𝑔 𝑋 = (𝑋 − 𝜇)2 . Then

𝐸𝑔 𝑋 =𝐸 𝑋−𝜇 2 = 𝑉(𝑋): the definition of variance of 𝑋.
7-1d Laws of Expected Value…
7.30
• We assume that 𝑋 𝑎𝑛𝑑 𝑌 are discrete random variables with
probability function 𝑝 𝑥 𝑎𝑛𝑑 𝑝 𝑦 and let 𝑎, 𝑏, 𝑎𝑛𝑑 𝑐 represent
constants.
1. 𝐸 𝑐 = 𝑐
• The expected value of a constant 𝑐 is just the value of the
constant.
2. 𝐸 𝑋 + 𝑐 = 𝐸 𝑋 + 𝑐
3. 𝐸 𝑐𝑋 = 𝑐𝐸(𝑋)
• The expected value of the product of a constant 𝑐 times a
function of a random variable is equal to the constant times the
expected value of the function of the variable.
FYI: Proof--Laws of Expected Value…
7.31
1. 𝐸 𝑐 = 𝑐
• Consider the function 𝑔 𝑋 = 𝑐. Then
𝐸𝑔 𝑋 = ෍ 𝑔 𝑥𝑖 𝑝(𝑐) = ෍ 𝑐𝑝(𝑐) = 𝑐 ෍ 𝑝(𝑐) = 𝑐
𝑥𝑖 𝑥𝑖 𝑥𝑖
2. 𝐸 𝑋 + 𝑐 = 𝐸 𝑋 + 𝐸 𝑐 = E 𝑋 + c (by 1)
3. 𝐸 𝑐𝑋 = 𝑐𝐸(𝑋)
• Consider the function 𝑔 𝑋 = 𝑐𝑋. Then
𝐸𝑔 𝑋 = ෍ 𝑔 𝑥𝑖 𝑝(𝑥𝑖 ) = ෍ 𝑐𝑥𝑖 𝑝(𝑥𝑖 ) = 𝑐 ෍ 𝑥𝑖 𝑝(𝑥𝑖 ) = 𝑐𝐸(𝑋)∎
𝑥𝑖 𝑥𝑖 𝑥𝑖
7-1d Laws of Variance…
7.32
• We assume that 𝑋 𝑎𝑛𝑑 𝑌 are discrete random variables with
probability function 𝑝 𝑥 𝑎𝑛𝑠 𝑝 𝑦 and let 𝑎, 𝑏, 𝑎𝑛𝑑 𝑐 represent
constants.
1. 𝑉 𝑐 = 0
• The variance of a constant 𝑐 is zero.
2. 𝑉 𝑋 + 𝑐 = 𝑉(𝑋)
• The variance of a random variable and a constant is just the
variance of the random variable.
3. 𝑉 𝑐𝑋 = 𝑐 2 𝑉(𝑋)
• The variance of a random variable and a constant coefficient
is the coefficient squared times the variance of the random
variable.
FYI: Proof -- Laws of Variance…
7.33
• 𝑉 𝑐𝑋 = 𝑐 2 𝑉(𝑋)
• Since 𝐸 𝑐𝑋 = 𝑐𝐸 𝑋 = 𝑐𝜇
𝑉 𝑐𝑋 = 𝐸 𝑐𝑋 − 𝑐𝜇 2 = 𝐸 𝑐2 𝑋 − 𝜇 2
= 𝑐2 𝐸 𝑋 − 𝜇 2
= 𝑐 2 V(X)∎
7-1d Laws of Variance…
7.34
• Example: If 𝐸 𝑋 = 𝜇𝑥 , 𝐸 𝑋 − 𝜇 2
= 𝜎𝑥2 , and 𝑌 = 𝑎 + 𝑏𝑋, then
𝐸 𝑌 = 𝑎 + 𝑏𝜇𝑥 , 𝑉 𝑌 = 𝑏 2 𝜎𝑥2 ∎
2
• 𝐸 𝑋2 ≥ 𝐸 𝑋 ??
2
• 𝑉 𝑋 =𝐸 𝑋−𝜇 = 𝐸 𝑋 2 − 2𝜇𝑋 + 𝜇2
2
=𝐸 𝑋2 − 2𝜇𝐸 𝑋 + 𝜇2 =𝐸 𝑋2 − 𝐸 𝑋
2
Since 𝑉 𝑋 ≥ 0, → 𝐸 𝑋 2 ≥ 𝐸 𝑋 ∎
Example: function of a random variable
7.35
• If a random variable 𝑋 has the probability distribution with
1 1 1
𝑃 −1 = , 𝑃 0 = , 𝑎𝑛𝑑 𝑃 1 = . Then find the expected value
3 3 3
of 𝑌 = 𝑋 .
2
• Solution:
• Probability distributions of 𝑋 𝑎𝑛𝑑 𝑋 2 are given by the table
below:
𝒙𝒊 𝒑(𝒙𝒊 ) 𝒚𝒋 = 𝒙𝟐𝒊 𝒑 𝒚𝒋 = 𝒑(𝒙𝟐𝒊 )

-1 1/3 1 2/3
0 1/3 0 1/3
1 1/3
total 1.0 1.0
Example: function of a random variable
7.36
𝒙𝒊 𝒑(𝒙𝒊 ) 𝒚𝒋 = 𝒙𝟐𝒊 𝒑 𝒚𝒋 = 𝒑(𝒙𝟐𝒊 )
-1 1/3 1 2/3
0 1/3 0 1/3
1 1/3
total 1.0 1.0
1 1 1
• 𝐸 𝑋 = σ𝑥𝑖 𝑥𝑖 𝑝(𝑥𝑖 ) = −1 +0 +1 =0
3 3 3
2
• 𝐸 𝑌 = 𝐸 𝑋 2 = σ𝑦𝑗 𝑦𝑗 𝑃(𝑦𝑗 ) = σ𝑥𝑖 𝑥𝑖2 𝑝(𝑥𝑖 ) = 1 + 0 1/3 = 2/3
3
• 𝑉 𝑋 =𝐸 𝑋−𝜇 2 = 𝐸 𝑋2 − 𝐸 𝑋 2 = 𝐸 𝑌 − 0 = 2/3
2 2 2 2
• 𝑉 𝑌 = 𝐸 𝑌 − 𝐸(𝑌) = 𝐸 𝑌2 − 𝐸 𝑌 2 = − ( )2 = ∎
3 3 9
Example 7.4…Describing the Population of
Monthly Profits 7.37
• Monthly sales have a mean of $25,000 and a standard
deviation of $4,000.
• Profits are calculated by multiplying sales by 30% and
subtracting fixed costs of $6,000.
Find the mean monthly profit.

1) Describe the problem statement in algebraic terms:
Let random variables 𝑋𝑎𝑛𝑑 𝑌 denote the monthly sales and
profit. Then
𝐸 𝑋 = $25,000 and
𝑌 = .3𝑋 − 6,000.
So, 𝐸 𝑌 = .3𝐸 𝑋 − $6000 = $1,500∎
Example 7.4…
7.38
Find the standard deviation of monthly profits.
• Let 𝑋 𝑎𝑛𝑑 𝑌 denote monthly sales and its profit.

since 𝑉 𝑋 = 40002 and 𝑌 = .3𝑋 − 6,000
𝑉 𝑌 =.32 𝑉 𝑋 = .09 × 16,000,000 =1,440,000
• So the standard deviation of 𝑌 is the 1,440,000 = $1,200
7-2 Bivariate Distributions (이변수분포)…
7.39
• Up to now, we have looked at univariate distributions, i.e.
probability distributions in one variable.
• A probability distribution involving two random variables is called
a bivariate probability distribution (also called a joint probability
distribution).
• Definition 7.10 (A joint probability distribution of X and Y ) is

a table or formula that lists the joint probabilities for all pairs
of values x and y.
• It is denoted:
𝑃 𝑥, 𝑦 = 𝑃 𝑋 = 𝑥, 𝑌 = 𝑦 .
Discrete Bivariate Distribution…
7.40
• As you might expect, a joint probability function must satisfy two
requirements:
1. 0 ≤ 𝑃 𝑥, 𝑦 ≤ 1 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑝𝑎𝑖𝑟𝑠 𝑜𝑓 𝑣𝑎𝑙𝑢𝑒𝑠 (𝑥, 𝑦)

2. σ𝑎𝑙𝑙 𝑥 σ𝑎𝑙𝑙 𝑦 𝑃(𝑥, 𝑦) = 1
Example 7.5… Bivariate Distribution of
the Number of House Sales 7.41
• Xavier and Yvette are real estate agents. Let X denote the number of
houses that Xavier will sell in a month and let Y denote the number of
houses Yvette will sell in a month.
• An analysis of their past monthly performances has the following joint
probabilities (bivariate probability distribution).
x
0 1 2 𝑃(𝑌 = 𝑦)
0 .12 .42 .06 .60
y 1 .21 .06 .03 .30
2 .07 .02 .01 .10
𝑃(𝑋 = 𝑥) .40 .50 .10 1.00
7-2a Marginal Probabilities (주변확률) …
7.42
• Definition 7.11 (Marginal probability function) Let X and Y be
jointly discrete random variables with joint probability function 𝑃(𝑥𝑖 , 𝑦𝑗 ).
Then the marginal probability functions of X and Y are given by
𝑃𝑥 𝑥𝑖 = σ𝑦 𝑝(𝑥𝑖 , 𝑦𝑗 ), and 𝑃𝑦 𝑦𝑗 = σ𝑥 𝑝(𝑥𝑖 , 𝑦𝑗 )
• Summing across rows and down columns of joint probability
distribution:
x P(x) y P(y)
0 .4 0 .6
1 .5 1 .3
2 .1 2 .1
1.0 1.0
• E.g The probability that Xavier sells 1 house: P(X=1) = 0.50
7-2b Describing the Bivariate Distribution…
7.43
• Using the marginal probabilities, we can compute the mean, variance,
and standard deviation of each variable in a bivariate distribution:
x P(x) y P(y)
0 .4 0 .6
1 .5 1 .3
2 .1 2 .1
1.0 1.0
• 𝐸 𝑋 = .7,
• 𝑉 𝑋 = 𝐸 𝑋 2 − ((𝐸 𝑋 )2 = .9 − .49 = .41, 𝜎𝑥 = 𝑉(𝑋) = .41 = .64
• 𝐸 𝑌 = .5
• 𝑉 𝑌 = 𝐸 𝑌 2 − ((𝐸 𝑌 )2 = .7 − .25 = .45, 𝜎𝑦 = 𝑉(𝑌) = .45 = .67
7.44
• There are two more parameters which deal with the relationship
between the two variables: the covariance* and the coefficient of
correlation*.
• Definition 7.11 (Covariance) The covariance of two discrete

variables is defined as
𝐶𝑜𝑣 𝑋, 𝑌 = ෍ ෍ 𝑥 − 𝜇𝑥 𝑦 − 𝜇𝑦 𝑃(𝑥, 𝑦)
𝑎𝑙𝑙 𝑥 𝑎𝑙𝑙 𝑦
or alternatively using this shortcut method:

𝐶𝑜𝑣 𝑋, 𝑌 = σ𝑎𝑙𝑙 𝑥 σ𝑎𝑙𝑙 𝑦 𝑥𝑦𝑃 𝑥, 𝑦 − 𝜇𝑥 𝜇𝑦
* covariance: 공분산; coefficient of correlation: 상관계수
7.45
• Definition 7.12 (Coefficient of correlation) The coefficient of correlation
is calculated in the same way as in Chap. 4.
𝐶𝑜𝑣(𝑋,𝑌)
𝜌=
𝜎𝑥 𝜎𝑦
Example 7.6 Describing the Bivariate Distribution…
7.46
• Compute the covariance and the coefficient of correlation between the
numbers of houses sold by Xavier and Yvette.
• Solution:
• Since 𝜇𝑥 = .7 and 𝜇𝑦 =.5,
𝐶𝑜𝑣 𝑋, 𝑌 = 0 − .7 0 − .5 . 12) + 1 − .7 0 − .5 . 42) + …
+ 2 − .7 0 − .5 .06 + ⋯ + 2 − .7 2 − .5 .01
= −.15∎
• Shortcut method: 𝐶𝑜𝑣 𝑋, 𝑌 = σ𝑎𝑙𝑙 𝑥 σ𝑎𝑙𝑙 𝑦 𝑥𝑦𝑃 𝑥, 𝑦 − 𝜇𝑥 𝜇𝑦

= .20 − .7 .5 = −.15∎
Example 7.6 Describing the Bivariate
Distribution…Xavier and Yvette from Example 7.5 7.47
X Y P(x,y) X∙Y∙P(x,y) 𝑿 − 𝝁𝒙 𝒀 − 𝝁𝒚 𝑷 𝒙, 𝒚 ∙
𝑿 − 𝝁𝒙 (𝒀 − 𝝁𝒚 )
0 0 .12 0 -.7 -.5 .042
0 1 .21 0 -.7 .5 -.074
0 2 .07 0 -.7 1.5 -.074
1 0 .42 0 .3 -.5 -.063
1 1 .06 .06 .3 .5 .009
1 2 .02 .04 .3 1.5 .009
2 0 .06 0 1.3 -.5 -.039
2 1 .03 .06 1.3 .5 .020
2 2 .01 .04 1.3 1.5 .020
𝜇𝑥 = .7 𝜇𝑦 = .5 0.20 -.150
Example 7.6 Describing the Bivariate Distribution…
7.48
• Solution:
• For coefficient of correlation, 𝜎𝑥 = .64, 𝜎𝑦 = .67,
𝐶𝑜𝑣(𝑋,𝑌) −.15
𝜌= = = −.35∎
𝜎𝑥 𝜎𝑦 .64 .67)
• There is a weak, negative relationship between the two variables.
FYI: Theorem: −1 ≤ 𝜌𝑥𝑦 ≤ 1
7.49
• Proof:
2
• 𝐸 𝑋 − 𝜇𝑥 − ℎ 𝑌 − 𝜇𝑦
2
= 𝐸[(𝑋 − 𝜇𝑥 )2 −2ℎ 𝑋 − 𝜇𝑥 𝑌 − 𝜇𝑦 + ℎ2 𝑌 − 𝜇𝑦 ]
= 𝜎𝑥2 − 2ℎ𝜎𝑥𝑦 + ℎ2 𝜎𝑦2 ≥ 0 (quadratic function of ℎ)
2
𝐷 = 𝜎𝑥𝑦 − 𝜎𝑥2 𝜎𝑦2 ≤ 0 f(h)
2 𝑓 ℎ = 𝜎𝑦2 ℎ2 − 2𝜎𝑥𝑦 ℎ + 𝜎𝑥2
𝜎𝑥𝑦 2 ≤ 1 ⇔ −1 ≤ 𝜌
∴ = 𝜌𝑥𝑦 𝑥𝑦 ≤ 1
𝜎𝑥2 𝜎𝑦2
FYI: Perfect Correlation
7.50
• 𝜌𝑥𝑦 = ±1 ⇔ 𝑋 𝑎𝑛𝑑 𝑌 𝑎𝑟𝑒 𝑝𝑒𝑟𝑓𝑒𝑐𝑡𝑙𝑦 𝑐𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑒𝑑.
e.g. 1 𝑋 𝑎𝑛𝑑 𝑋
𝜎𝑥𝑥 𝜎𝑥2
𝜎𝑥𝑥 = 𝐸[ 𝑋 − 𝜇𝑥 𝑋 − 𝜇𝑥 ] = 𝜎𝑥2 , 𝜌𝑥𝑥 = = =1
𝜎𝑥 𝜎𝑥 𝜎𝑥2
e.g. 2 𝑋 𝑎𝑛𝑑 𝑌 = 𝑎 + 𝑏𝑋 (𝑏 ≠ 0)
𝜎𝑥𝑦 = 𝐸[ 𝑋 − 𝜇𝑥 𝑌 − 𝜇𝑦 ] = 𝐸[ 𝑋 − 𝜇𝑥 𝑎 + 𝑏𝑋 − 𝑎 − 𝑏𝜇𝑥 ]
= 𝑏𝐸 𝑋 − 𝜇𝑥 2 = 𝑏𝜎𝑥2
𝜎𝑦2 = 𝑏 2 𝜎𝑥2
𝜎𝑥𝑦 𝑏𝜎𝑥2 = 1 𝑖𝑓 𝑏 > 0
⇒ 𝜌𝑥𝑦 = = ቊ
𝜎𝑥 𝜎𝑦 𝜎𝑥 𝑏 𝜎𝑥 = −1 𝑖𝑓 𝑏 < 0
7-2c Sum of Two Variables…
7.51
• The bivariate distribution allows us to develop the probability
distribution of any combination of the two variables, of particular
interest is the sum of two variables.
• Return to Example 7.5 of Xavier and Yvette selling houses. The sum of
the two variables X and Y is the total number of houses sold per
month.
• The possible values of 𝑋 + 𝑌 are 0, 1, 2, 3, and 4.
• The probability that 𝑋 + 𝑌 = 2, for example, is obtained by
summing the joint probabilities of all pairs of values of X and Y
that sum to 2:
𝑃 𝑋 + 𝑌 = 2 = 𝑃 0, 2 + 𝑃 1, 1 + 𝑃 2, 0 = .07 + .06 + .06 = .19∎
Example 7.7… The Probability Distribution of
X+Y 7.52
• From joint probability distribution,
x
0 1 2 𝑃(𝑌 = 𝑦)
0 .12 .42 .06 .60
y 1 .21 .06 .03 .30

2 .07 .02 .01 .10
𝑃(𝑋 = 𝑥) .40 .50 .10 1.00
• We can create the probability distribution of X+Y:
X+Y 0 1 2 3 4
P(X+Y) .12 .63 .19 .05 .01
7-2c Sum of Two Variables…
7.53
X+Y 0 1 2 3 4
P(X+Y) .12 .63 .19 .05 .01
• 𝐸 𝑋 + 𝑌 = 1 .63 + 2 .19 + 3 .05 + 4 .01 = 1.2 = 𝐸 𝑋 + 𝐸(𝑌)∎

2
• 𝑉 𝑋+𝑌 =𝐸 𝑋+𝑌 − [𝐸(𝑋 + 𝑌)]2
=1 .63 + 4 .19 + 9 .05 + 16 .01 − 1.22
= 2 − 1.44 = .56 ∎
𝜎𝑥+𝑦 = 𝑉(𝑋 + 𝑌) = .56 = .75 ∎
Laws of Expected Value and Variance of
the Sum of Two Variables… 7.54
• We can derive laws of expected value and variance for the sum of
two variables as follows:
1. 𝐸 𝑋 + 𝑌 = 𝐸 𝑋 + 𝐸 𝑌
2. 𝑉 𝑋 ± 𝑌 = 𝑉 𝑋 + 𝑉 𝑌 ± 2𝐶𝑜𝑣(𝑋, 𝑌)
• If X and Y are independent, 𝐶𝑜𝑣 𝑋, 𝑌 = 0 and thus
𝑉 𝑋+𝑌 =𝑉 𝑋 +𝑉 𝑌
• Example 7.7
• Using law 1 we compute the expected value of 𝑋 + 𝑌:
𝐸 𝑋 + 𝑌 = 𝐸 𝑋 + 𝐸 𝑌 = .7 + .5 = .12∎
• Apply law 2 to determine the variance:
𝑉 𝑋 + 𝑌 = 𝑉 𝑋 + 𝑉 𝑌 + 2𝐶𝑜𝑣 𝑋, 𝑌 = .41 + .45 + 2 −.15 = .56∎
Laws of Expected Value and Variance of
the Sum of Two Variables… 7.55
• For more general cases of 𝑎𝑋 ± 𝑏𝑌 :
𝐸 𝑎𝑋 ± 𝑏𝑌 = 𝑎𝐸 𝑋 ± 𝑏𝐸 𝑌 = 𝑎𝜇𝑥 ± 𝑏𝜇𝑦
𝑉 𝑎𝑋 + 𝑏𝑌 = 𝑎2 𝑉 𝑋 + 𝑏 2 𝑉 𝑌 ± 2𝑎𝑏𝐶𝑜𝑣(𝑋, 𝑌)
, where 𝑎 and 𝑏 are constants.
Proof:
2 2
𝑉 𝑎𝑋 ± 𝑏𝑌 = 𝐸 𝑎𝑋 ± 𝑏𝑌 − 𝐸 𝑎𝑋 ± 𝑏𝑌
= 𝐸 𝑎2 𝑋 2 ± 2𝑎𝑏𝑋𝑌 + 𝑏 2 𝑌 2 −[𝑎2 𝜇𝑥2 ± 2𝑎𝑏𝜇𝑥 𝜇𝑦 + 𝑏 2 𝜇𝑦2 ]
= 𝑎2 𝐸 𝑋 2 − 𝜇𝑥2 + 𝑏 2 𝐸 𝑌 2 − 𝜇𝑦2 ± 2𝑎𝑏 𝐸 𝑋𝑌 − 𝜇𝑥 𝜇𝑦
= 𝑎2 𝑉 𝑋 + 𝑏2 𝑉(𝑌) ± 2𝑎𝑏𝐶𝑜𝑣(𝑋, 𝑌) ∎
Conditional Probability…optional
7.56
• Definition 7.13 (Conditional probability, Joint probability)
• The conditional probability that X takes on 𝑥𝑖 given that 𝑌 = 𝑦𝑗 is
calculated as:
𝑃(𝑋=𝑥𝑖 ,𝑌=𝑦𝑗 )
𝑃 𝑥𝑖 𝑦𝑗 = 𝑃 𝑋 = 𝑥𝑖 𝑌 = 𝑦𝑗 =
𝑃𝑦 (𝑌=𝑦𝑗 )
• The joint probability of 𝑃(𝑋 = 𝑥𝑖 , 𝑌 = 𝑦𝑗 ) = 𝑃(𝑥𝑖 , 𝑦𝑗 ):

𝑃 𝑥𝑖 , 𝑦𝑗 = 𝑃𝑦 𝑦𝑗 𝑃 𝑥𝑖 𝑦𝑗
Statistical Independence…optional
7.57
• Definition 7.14 (Statistical independence: 𝑋 ⊥ 𝑌)
[𝑃 𝑥𝑖 𝑦𝑗 = 𝑃𝑥 (𝑥𝑖 ), 𝑃 𝑦𝑗 𝑥𝑖 = 𝑃𝑦 (𝑦𝑗 )] ⇔ [𝑃 𝑥𝑖 , 𝑦𝑗 = 𝑃𝑥 𝑥𝑖 𝑃𝑦 𝑦𝑗 ]
• If X and Y are independent random variables, the conditional

probability is the same as its marginal probability.
• If X and Y are independent random variables, then 𝐶𝑜𝑣 𝑋, 𝑌 = 0
• If, on the other hand, 𝐶𝑜𝑣 𝑋, 𝑌 = 0, then the random variables X
and Y need not be independent.
Statistical Independence…optional
7.58
• Statistical independence: 𝑋 ⊥ 𝑌
𝐶𝑜𝑣 𝑋, 𝑌 = 𝐸 𝑋𝑌 − 𝜇𝑥 𝜇𝑦 = 0
proof: 𝐸 𝑋𝑌 = σ𝑛𝑖=1 σ𝑚
𝑗=1 𝑥𝑖 𝑦𝑗 𝑃 𝑥𝑖 , 𝑦𝑗
= σ𝑛𝑖=1 σ𝑚
𝑗=1 𝑥𝑖 𝑦𝑗 𝑃𝑥 (𝑥𝑖 )𝑃𝑦 (𝑦𝑗 ) (⸪ independence)
= σ𝑛𝑖=1 𝑥𝑖 𝑃𝑥 (𝑥𝑖 ) σ𝑚
𝑗=1 𝑦𝑗 𝑃𝑦 (𝑦𝑗 )
= 𝜇𝑥 𝜇𝑦
Statistical Independence(Example)
7.59
• Let X be a random variable with
1 1
= 𝑖𝑓 𝑥 = 1 𝑜𝑟 − 1 = 𝑖𝑓 𝑦 = 1
4
𝑃𝑥 𝑥 ቐ 1 , and 𝑌 = 𝑥 𝑎𝑛𝑑 𝑃𝑦 𝑦 ቐ 21
2
= 𝑖𝑓 𝑥 = 0 = 𝑖𝑓 𝑦 = 0
2 2
x
-1 0 1 𝑃𝑦 (𝑦𝑗 )
0 0 .5 0 .5
y
1 .25 0 .25 .5
𝑃𝑥 (𝑥𝑖 ) .25 .5 .25 1.00
Statistical Independence (Example)
7.60
𝜇𝑥 = −1 .25 + 0 .5 + 1 .25 = 0,
1
𝜇𝑦 = 1 .5 + 0 .5 =
2
𝜎𝑥𝑦 = 𝐸 𝑋𝑌 − 𝜇𝑥 𝜇𝑦 = −1 .25 + 1 .25 − 0 = 0 ↔ Uncorrelated!
𝑃(−1,0) 0
• However, 𝑃 𝑋 = −1 𝑌 = 0 = = = 0 ≠ 𝑃𝑥 −1 = .25
𝑃𝑦 (0) .5
→ X and Y are uncorrelated(which means they don’t have a linear

relationship) but the value of Y depend upon the values of X . Y is not
statistically independent of X.
7-3 (Optional) Portfolio Diversification and
Asset Allocation 7.61
• Consider an investor who forms a portfolio, consisting of only two
stocks, by investing $4,000 in one stock and $6,000 in a second stock.
Suppose that the results after 1 year are:
One-Year Results:
Stock Initial Value of investment Rate of return on

investment($) after one year($) investment
1 4,000 5,000 𝑅1 = .25(25%)
2 6,000 5,400 𝑅2 = −.10(−10%)
Total 10,000 10,400 𝑅𝑝 = .04(4 = %)
𝑔𝑎𝑖𝑛(𝑜𝑟 𝑙𝑜𝑠𝑠) 400

* Rate of return= = = .04
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 10,000
7-3 Portfolio Diversification and Asset Allocation
7.62
• Another way of calculating the portfolio return 𝑅𝑝 is to compute the
weighted average of the individual returns 𝑅1 and 𝑅2 , where the
weights 𝑤1 and 𝑤2 are the proportions of the initial $10,000
invested in stocks 1 and 2, respectively. Since
𝑅𝑝 = 𝑤1 𝑅1 + 𝑤2 𝑅2
𝑅𝑝 = .4 .25 + .6 −.10 = .04
• When the initial investments are made, the investor does not know what
the returns will be. The returns are random variables and we are
interested in determining the expected value and variance of the
portfolio.
Portfolio Diversification and Asset Allocation:
7.63
• Mean and Variance of a portfolio of two stocks
• Using the laws of expected value and variance, following
formulas are derived: Since 𝑅𝑝 = 𝑤1 𝑅1 + 𝑤2 𝑅2 ,
𝐸 𝑅𝑝 = 𝑤1 𝐸 𝑅1 + 𝑤2 𝐸(𝑅2 )
𝑉 𝑅𝑝 = 𝑤12 𝑉 𝑅1 + 𝑤22 𝑉 𝑅2 + 2𝑤1 𝑤2 𝐶𝑜𝑣(𝑅1 , 𝑅2 )
= 𝑤12 𝜎12 + 𝑤22 𝜎22 + 2𝑤1 𝑤2 𝜌𝜎1 𝜎2 ∎
• 𝑤1 and 𝑤2 : the weights of investments 1 and 2
• 𝐸(𝑅1 ) and 𝐸(𝑅2 ): their expected values
• σ1 and σ2 : their standard deviations
• 𝐶𝑜𝑣(𝑅1 , 𝑅2 ): covariance and ρ is the coefficient of
correlation. (* Recall that 𝜌 = 𝐶𝑜𝑣(𝑅
𝜎 𝜎
1 ,𝑅2 )
, which means that 𝐶𝑜𝑣 𝑅1 , 𝑅2 =
1 2
𝜌𝜎1 𝜎2 ).
Example 7.8 Describing the Population of
the Returns on a Portfolio 7.64
• An investor has decided to form a portfolio by putting 25% of his
money into McDonald’s stock and 75% into Cisco Systems stock.
The investor assumes that the expected returns will be 8% and
15%, respectively, and that the standard deviations will be 12%
and 22%, respectively.
a. Find the expected return on the portfolio.
b. Compute the standard deviation of the returns on the portfolio
assuming that
(i) the two stocks’ returns are perfectly positively correlated
(ii) the coefficient of correlation is .5
(iii) the two stocks’ returns are uncorrelated
Example 7.8 Solution
7.65
• The expected values of the two stocks:
𝐸 𝑅1 = .08, 𝐸 𝑅2 = .15
• The weights: 𝑤1 = .25, 𝑤2 = .75
Thus,
𝐸 𝑅𝑝 = 𝑤1 𝐸 𝑅1 + 𝑤2 𝐸 𝑅2
= .25 .08 + .75 .15 = .1325∎
Example 7.8 Solution continued…
7.66
• The standard deviations: σ1 = .12, σ2 = .22
𝑉 𝑅𝑝 = 𝑤12 𝜎12 + 𝑤22 𝜎22 + 2𝑤1 𝑤2 𝜌𝜎1 𝜎2
= (.252)(.122) + (.752)(.222) + 2(.25)(.75)𝜌(.12)(.22)
= .0281 + .0099𝜌
• When 𝜌 = 1,
𝑉 𝑅𝑝 = .0281 + .0099 1 = .0380 → 𝜎𝑅𝑝 = .1949
• When 𝜌 = .5,
𝑉 𝑅𝑝 = .0281 + .0099 .5 = .0331 → 𝜎𝑅𝑝 = .1819
• When 𝜌 = 0,
𝑉 𝑅𝑝 = .0281 + .0099 0 = .0281 → 𝜎𝑅𝑝 = .1676
• Notice that the variance and standard deviation of the returns

on the portfolio decreases as the coefficient of correlation of
the two stocks’ returns decreases. (cf. 𝜌 < 0.)
7-3a Portfolio Diversification in Practice
7.67
• The formulas introduced in this section require that we know the
expected values, variances, and covariance (or coefficient of
correlation) of the investments we’re interested in.
• The question arises: how do we determine these parameters?
(Incidentally, this question is rarely addressed in finance textbooks!)
• The most common procedure is to estimate the parameters from

historical data, using sample statistics.
7-3b Portfolios with More Than Two Stocks
7.68
• We can extend the formulas that describe the mean and
variance of the returns of a portfolio of two stocks to a portfolio
of any number of stocks (𝑘 stocks).
𝐸 𝑅𝑝 = σ𝑘𝑖=1 𝑤𝑖 𝐸(𝑅𝑖 )
𝑉 𝑅𝑝 = σ𝑘𝑖=1 𝑤𝑖2 𝜎𝑖2 + 2 σ𝑘−1 𝑘

𝑖=1 σ𝑗=𝑖+1 𝑤𝑖 𝑤𝑗 𝐶𝑜𝑣(𝑅𝑖 , 𝑅𝑗 )
where 𝑅𝑖 is the return of the 𝑖 𝑡ℎ stock, 𝑤𝑖 is the proportion of the

portfolio invested in stock i, and k is the number of stocks in the
portfolio.
7-3b Portfolios with More Than Two Stocks
7.69
• When k is greater than 2, the calculations can be tedious and
time-consuming.
• When k = 3, we need to know the values of the three weights,
three expected values, three variances, and three
covariances.
• When k = 4, there are four expected values, four variances
and six covariances. [The number of covariances required in
general is k(k-1)/2.]
• To assist you we have created an Excel worksheet to

perform the computations when k = 2, 3, or 4.
7-4 Binomial Distribution…
7.70
• We’ve introduced probability distributions in general.
• We need to introduce two discrete, specific probability
distributions:
• Binomial Distribution (이항분포)
• Poisson Distribution (포와송분포)
7.71
• Definition 7.15 (A Binomial Experiment: 이항실험) possesses the
following properties:
1. The experiment consists of a fixed number, 𝑛, of identical trials.
2. Each trial has two possible outcomes, success (S) and failure
(F).
3. The probability of success is p. The probability of failure is 1 − 𝑝.
4. The trials are independent, which means that the outcome of
one trial does not affect the outcomes of any other trials.
⇔ An experiment which consists of of 𝑛 independent Bernoulli trials

with success probability 𝑝 for each trial.
7.72
• Definition 7.16 (A Bernoulli process): If properties 2,3, and 4 are
satisfied, we say that each trial is a Bernoulli process (trial or
experiment).
𝛺 ∗= {𝑆, 𝐹}; 𝑃 𝑆 = 𝑝, 𝑃 𝐹 = 1 − 𝑝
• Bernoulli random variable 𝑋 is the number of success on each
trial, so it takes on 0 or 1.
• 𝑝 𝑋 = 1 = 𝑝, 𝑝 𝑋 = 0 = 1 − 𝑝
• 𝐸 𝑋 =𝑝
• 𝑉 𝑋 = 𝐸 𝑋 2 − [𝐸 𝑋 ]2 𝑿=𝒙 𝒑(𝒙)
𝑥 0 1−𝑝
= 𝑝 − 𝑝2 = 𝑝(1 − 𝑝)
1 𝑝
1.0
* Ω: 𝑠𝑎𝑚𝑝𝑙𝑒 𝑠𝑝𝑎𝑐𝑒 (표본공간)
7.73
• A Binomial experiment consists of of 𝑛 independent Bernoulli
trials with success probability 𝑝 for each trial. (the sum of n
independent Bernoulli experiments)
• Example: Flip a coin 10 times:

• The two outcomes per trial are heads and tails. The terms
success and failure are arbitrary. Though we can label either
outcome success, we generally call success anything we’re
looking for.
• If the coin is fair, 𝑝 = .5, that is, the probability of success.
• Finally, the trials are independent, because the outcome of
previous coin flip cannot affect the outcomes of the next
flips.
7.74
• Example: Drawing 5 cards out of a shuffled deck without
replacement
• Interested in knowing the probability of receiving five clubs, a
club is labeled as a success.
• On the first draw, the probability of a club is 13/52 = .25.
• Suppose that the first draw is a club. If we draw again without
replacement, the probability of drawing a second club is
12/51, which is not .25.
• In this experiment, the trials are not independent, so not a
binomial experiment!.
7.75
• Example: A political survey asks 1,500 voters who they intend to
vote for in an approaching election.
• In most elections in the United States, there are only two
candidates, the Republican and Democratic nominees.
We have two outcomes per trial.
• The trials are independent because the choice of one
voter does not affect the choice of other voters.
• In some other countries, there are usually several
candidates in the race. However, we can label a vote for
our favored candidate a success and all the others failures.
7.76
• A political survey example is a very common application of
statistical inference. The actual value of 𝑝 is unknown, our job is
to estimate its value.
• By understanding the probability distribution that uses 𝑝, we will
be able to develop the statistical tools to estimate 𝑝.
Meaning of Success and Failure…
7.77
• …are just labels for a binomial experiment, there is no value
judgment implied. Not necessarily “good” in everyday sense
of the word.
• A coin flip will result in either heads or tails. If we define

“heads” as success then necessarily “tails” is considered a
failure.
• Other binomial experiment notions:

• An election candidate wins or loses
• An employee is male or female
7-4a Binomial Random Variable…
7.78
• Definition 7. 17 (The binomial probability distribution)
• Let X be the number of successes in a binomial experiment.
Then a random variable X is said to have a binomial distribution
based on n trials with success probability p if and only if
𝑃 𝑋 = 𝑥 = 𝑝 𝑥 = 𝐶𝑥𝑛 𝑝 𝑥 (1 − 𝑝)𝑛−𝑥 , 𝑥 = 0, 1, 2, ⋯ , 𝑛 𝑎𝑛𝑑 0 ≤ 𝑝 ≤ 1.
• Notation:
𝑋~𝐵 𝑛, 𝑝 : 𝑋 𝑓𝑜𝑙𝑙𝑜𝑤𝑠 𝑎 𝑏𝑖𝑛𝑜𝑚𝑖𝑎𝑙 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑤𝑖𝑡ℎ 𝑝𝑎𝑟𝑎𝑚𝑒𝑡𝑒𝑟𝑠 𝑛 𝑎𝑛𝑑 𝑝.
• X can take on values 0, 1, 2, …, 𝑛. Thus, it’s countable and a
discrete random variable.
• X is the sum of n independent Bernoulli random variables 𝑋𝑖 (𝑖 =
1, 2, … , 𝑛): 𝑋 = σ𝑛𝑖=1 𝑋𝑖
Binomial Random Variable…
7.79
• Using a probability tree, we draw a series of branches as
depicted in Figure. 7.2.
• The stages represent the outcomes for each of the 3 trials. At
each stage, there are two branches representing success
and failure.
• Want to calculate the probability that there are 𝑥 successes
in 3 trials: x successes implies 3 − 𝑥 failures.
• For each success in the sequence we multiply by 𝑝. For
each failure in the sequence, we multiply by (1 − 𝑝)
(independence)
Binomial Random Variable…
7.80
• Thus the probability for each sequence of branches that
represent 𝑥 successes and 3 − 𝑥 failures has probability
𝑝 𝑥 (1 − 𝑝)3−𝑥
• To count the number of branch sequences that produces 𝑥
successes and 𝑛 − 𝑥 failures, we use the combinatorial
formula
3!
𝐶𝑥3 =
𝑥!(3−𝑥)!
where 3! = 3 2 1 = 6.
Figure 7.2 Probability Tree for a Binomial
Experiment … 7.81
• 𝑛=3
Experimental 𝑥 𝑠𝑢𝑐𝑐𝑒𝑠𝑠𝑒𝑠
Stage 1: Stage 2: Stage 3: outcomes 𝑎𝑛𝑑 𝑛 − 𝑥 𝑓𝑎𝑖𝑙𝑢𝑟𝑒𝑠
Trial 1 Trial 2 Trial 3
S 𝑆, 𝑆, 𝑆 𝑥=3
S
F 𝑆, 𝑆, 𝐹 𝑥=2
S 𝑆, 𝐹, 𝑆 𝑥=2
S
F
F 𝑆, 𝐹, 𝐹 𝑥=1
S 𝐹, 𝑆, 𝑆 𝑥=2
F S
F 𝐹, 𝑆, 𝐹 𝑥=1
S 𝐹, 𝐹, 𝑆 𝑥=1
F
F 𝐹, 𝐹, 𝐹 𝑥=0
Figure 7.2 Probability Tree for a Binomial
Experiment… 7.82
• 𝑛=3
x successes and
n−x failures
𝑝 𝑥 (1 − 𝑝)𝑛−𝑥
Trial 1 Trial 2 Trial 3
𝑆, 𝑆, 𝑆 : 𝑃(𝑋 = 3) = 𝑝3
S
S 𝑆, 𝑆, 𝐹 : 𝑃 𝑋 = 2 = 𝑝2 1 − 𝑝
F
S 𝑆, 𝐹, 𝑆 : 𝑃 𝑋 = 2 = 𝑝2 (1 − 𝑝)
S
F
F 𝑆, 𝐹, 𝐹 : 𝑃 𝑋 = 1 = 𝑝(1 − 𝑝)2
S
𝐹, 𝑆, 𝑆 : 𝑃 𝑋 = 2 = (1 − 𝑝)𝑝2
F S
F 𝐹, 𝑆, 𝐹 : 𝑃 𝑋 = 1 = (1 − 𝑝)2 𝑝
S 𝐹, 𝐹, 𝑆 : 𝑃 𝑋 = 1 = (1 − 𝑝)2 𝑝
F
F 𝐹, 𝐹, 𝐹 : 𝑃 𝑋 = 0 = (1 − 𝑝)3
Derivation of Binomial Probability
Distribution p(x)…Binomial Expansion 7.83
• Binomial expansion of (𝑝 + 𝑞)𝑛 : 𝑃 𝑆 = 𝑝, 𝑃 𝐹 = 𝑞 = 1 − 𝑝
(𝑝 + 𝑞)𝑛 = (𝑝 + 𝑞)(𝑝 + 𝑞) ⋯ (𝑝 + 𝑞)
𝑛
= 𝑝0 𝑞𝑛 + 𝑛𝑝1 𝑞𝑛−1 + ⋯ + 𝑛𝑝𝑛−1 𝑞1 + 𝑝𝑛 𝑞0

= 𝐶0𝑛 𝑝0 𝑞𝑛 + 𝐶1𝑛 𝑝1 𝑞𝑛−1 +⋯ + 𝐶𝑛−1
𝑛
𝑝𝑛−1 𝑞1 + 𝐶𝑛𝑛 𝑝𝑛 𝑞0
= σ𝑛𝑥=0 𝐶𝑥𝑛 𝑝 𝑥 𝑞𝑛−𝑥
= σ𝑛𝑥=0 𝑝(𝑥) ∎
Derivation of Binomial Probability
Distribution p(x)…Binomial Expansion 7.84
• 𝑝 𝑥 = 𝐶𝑥𝑛 𝑝 𝑥 𝑞𝑛−𝑥 , 𝑥 = 0, 1, 2, ⋯ 𝑛, are the probabilities of the events
of 𝑥 times successes out of 𝑛 trials.
• 𝑝(𝑥) satisfies the necessary properties of the probability function:
• 𝑝 𝑥 ≥ 0, 𝑥 = 0, 1, 2, … , 𝑛
• σ𝑛𝑥=0 𝑝(𝑥) = σ𝑛𝑥=0 𝐶𝑥𝑛 𝑞 𝑥 𝑝𝑛−𝑥 = (𝑝 + 𝑞)𝑛 = [𝑝 + 1 − 𝑝 ]𝑛 = 1∎
Example 7.9 Pat Statsdud…
7.85
• Pat Statsdud is a (not good) student taking a statistics course.
Pat’s exam strategy is to rely on luck for the next quiz. The quiz
consists of 10 multiple-choice questions. Each question has five
possible answers, only one of which is correct. Pat plans to
guess the answer to each question.
Q1 What is the probability that Pat gets no answers correct?
Q2 What is the probability that Pat gets two answers correct?
Example 7.9 Pat Statsdud…
7.86
• Is this a binomial experiment? Check the conditions:
✓ There is a fixed finite number of trials (n = 10).
✓ An answer can be either correct or incorrect.
✓ The probability of a correct answer (P(success)=.20) does
not change from question to question.
✓ Each answer is independent of the others.
Pat Statsdud…
7.87
n =10, and P(success) = .20
• What is the probability that Pat gets no answers correct?

I.e. # success, x, = 0; hence we want to know P(x=0):
10!
𝑃 0 = .20 (1 − .2)10−0 = (1) 1 .810 = .1074∎
0! 10 − 0 !
Pat has about an 11% chance of getting no answers correct

using the guessing strategy.
Pat Statsdud…
7.88
n =10, and P(success) = .20
• What is the probability that Pat gets two answers correct?

I.e. # success, x, = 2; hence we want to know P(x=2):
10!
𝑃 2 = .22 1 − .2 10−2 = 45 .04 . 1678) = .3020∎
2! 10 − 2 !
Pat has about a 30% chance of getting exactly two answers

correct using the guessing strategy.
7-4b Cumulative Probability (누적확률) …
7.89
• Thus far, we have been using the binomial probability
distribution to find probabilities for individual values of x.
• A mark is considered a failure if it is less than 50% ( i.e. less
than 5 questions out of 10).
• “Find the probability that Pat fails the quiz”
requires a cumulative probability*, that is, 𝑃(𝑋 ≤ 𝑥).
* Cumulative distribution function (cdf): 𝐹(𝑥) ≡ 𝑃(𝑋 ≤ 𝑥)
Example 7.10 Will Pat Fail the Quiz?
7.90
• Solution:
𝑃 𝑋 ≤4 =𝑃 0 +𝑃 1 +𝑃 2 +𝑃 3 +𝑃 4 :
• Using the binomial formula, we find those probabilities;
𝑃 0 = .1074, 𝑃 1 = .2684, 𝑃 2 = .3020, 𝑃 3 = .2013, 𝑃 4 = .0881
• We have:
𝑃 𝑋 ≤ 4 = .1074 + .2684 + … + .0881 = .9672
• There is a 96.72% probability that Pat will fail the quiz by
guessing the answer for each question.
• What is the probability that Pat will pass the quiz?
𝑃 𝑋 ≥ 5 = 1 − 𝑃 𝑋 ≤ 4 = 1 − .9672 = .0328
7-4c Binomial Table
7.91
• Calculating binomial probabilities by hand is tedious and error-
prone. There is an easier way to determine binomial probabilities.
• Table 1 in Appendix B provides cumulative binomial probabilities
for selected values of 𝑛 𝑎𝑛𝑑 𝑝.
• First get the correct table for given values of 𝑛 𝑎𝑛𝑑 𝑝.
• Example: 𝑛 = 10, 𝑝 = .2
Binomial Table…
7.92
• The probabilities listed in the tables are cumulative, i.e., 𝑃(𝑋 ≤ 𝑘)
• 𝑘 is the row index; the columns of the table are organized by
𝑃 𝑠𝑢𝑐𝑐𝑒𝑠𝑠 = 𝑝
n = 10
k 0.01 0.05 0.1 0.2 0.25 0.3 0.4 0.5 0.6 0.7 0.75 0.8 0.9 0.95 0.99
0 0.9044 0.5987 0.3487 0.1074 0.0563 0.0282 0.0060 0.0010 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
1 0.9957 0.9139 0.7361 0.3758 0.2440 0.1493 0.0464 0.0107 0.0017 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000
2 0.9999 0.9885 0.9298 0.6778 0.5256 0.3828 0.1673 0.0547 0.0123 0.0016 0.0004 0.0001 0.0000 0.0000 0.0000
3 1.0000 0.9990 0.9872 0.8791 0.7759 0.6496 0.3823 0.1719 0.0548 0.0106 0.0035 0.0009 0.0000 0.0000 0.0000
4 1.0000 0.9999 0.9984 0.9672 0.9219 0.8497 0.6331 0.3770 0.1662 0.0473 0.0197 0.0064 0.0001 0.0000 0.0000
5 1.0000 1.0000 0.9999 0.9936 0.9803 0.9527 0.8338 0.6230 0.3669 0.1503 0.0781 0.0328 0.0016 0.0001 0.0000
6 1.0000 1.0000 1.0000 0.9991 0.9965 0.9894 0.9452 0.8281 0.6177 0.3504 0.2241 0.1209 0.0128 0.0010 0.0000
7 1.0000 1.0000 1.0000 0.9999 0.9996 0.9984 0.9877 0.9453 0.8327 0.6172 0.4744 0.3222 0.0702 0.0115 0.0001
8 1.0000 1.0000 1.0000 1.0000 1.0000 0.9999 0.9983 0.9893 0.9536 0.8507 0.7560 0.6242 0.2639 0.0861 0.0043
9 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.9999 0.9990 0.9940 0.9718 0.9437 0.8926 0.6513 0.4013 0.0956
Binomial Table… 7.93
• “What is the probability that Pat gets no answers correct?”
i.e., what is P(x = 0), given P(success) = .20 and n =10 ?
n = 10
k 0.01 0.05 0.1 0.2 0.25 0.3 0.4 0.5 0.6 0.7 0.75 0.8 0.9 0.95 0.99
0 0.9044 0.5987 0.3487 0.1074 0.0563 0.0282 0.0060 0.0010 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
1 0.9957 0.9139 0.7361 0.3758 0.2440 0.1493 0.0464 0.0107 0.0017 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000
2 0.9999 0.9885 0.9298 0.6778 0.5256 0.3828 0.1673 0.0547 0.0123 0.0016 0.0004 0.0001 0.0000 0.0000 0.0000
3 1.0000 0.9990 0.9872 0.8791 0.7759 0.6496 0.3823 0.1719 0.0548 0.0106 0.0035 0.0009 0.0000 0.0000 0.0000
4 1.0000 0.9999 0.9984 0.9672 0.9219 0.8497 0.6331 0.3770 0.1662 0.0473 0.0197 0.0064 0.0001 0.0000 0.0000
5 1.0000 1.0000 0.9999 0.9936 0.9803 0.9527 0.8338 0.6230 0.3669 0.1503 0.0781 0.0328 0.0016 0.0001 0.0000
6 1.0000 1.0000 1.0000 0.9991 0.9965 0.9894 0.9452 0.8281 0.6177 0.3504 0.2241 0.1209 0.0128 0.0010 0.0000
7 1.0000 1.0000 1.0000 0.9999 0.9996 0.9984 0.9877 0.9453 0.8327 0.6172 0.4744 0.3222 0.0702 0.0115 0.0001
8 1.0000 1.0000 1.0000 1.0000 1.0000 0.9999 0.9983 0.9893 0.9536 0.8507 0.7560 0.6242 0.2639 0.0861 0.0043
9 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.9999 0.9990 0.9940 0.9718 0.9437 0.8926 0.6513 0.4013 0.0956
P(x = 0) = P(x ≤ 0) = .1074
Binomial Table… 7.94
• “What is the probability that Pat gets two answers correct?”

i.e. what is P(x = 2), given P(success) = .20 and n=10 ?
n = 10
k 0.01 0.05 0.1 0.2 0.25 0.3 0.4 0.5 0.6 0.7 0.75 0.8 0.9 0.95 0.99
0 0.9044 0.5987 0.3487 0.1074 0.0563 0.0282 0.0060 0.0010 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
1 0.9957 0.9139 0.7361 0.3758 0.2440 0.1493 0.0464 0.0107 0.0017 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000
2 0.9999 0.9885 0.9298 0.6778 0.5256 0.3828 0.1673 0.0547 0.0123 0.0016 0.0004 0.0001 0.0000 0.0000 0.0000
3 1.0000 0.9990 0.9872 0.8791 0.7759 0.6496 0.3823 0.1719 0.0548 0.0106 0.0035 0.0009 0.0000 0.0000 0.0000
4 1.0000 0.9999 0.9984 0.9672 0.9219 0.8497 0.6331 0.3770 0.1662 0.0473 0.0197 0.0064 0.0001 0.0000 0.0000
5 1.0000 1.0000 0.9999 0.9936 0.9803 0.9527 0.8338 0.6230 0.3669 0.1503 0.0781 0.0328 0.0016 0.0001 0.0000
6 1.0000 1.0000 1.0000 0.9991 0.9965 0.9894 0.9452 0.8281 0.6177 0.3504 0.2241 0.1209 0.0128 0.0010 0.0000
7 1.0000 1.0000 1.0000 0.9999 0.9996 0.9984 0.9877 0.9453 0.8327 0.6172 0.4744 0.3222 0.0702 0.0115 0.0001
8 1.0000 1.0000 1.0000 1.0000 1.0000 0.9999 0.9983 0.9893 0.9536 0.8507 0.7560 0.6242 0.2639 0.0861 0.0043
9 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.9999 0.9990 0.9940 0.9718 0.9437 0.8926 0.6513 0.4013 0.0956
P(x = 2) = P(x≤2) – P(x≤1) = .6778 – .3758 = .3020

• Remember the table shows cumulative probabilities.
Binomial Table … 7.95
• What is the probability that Pat fails the quiz”?
i.e. what is P(X ≤ 4), given P(success) = .20 and n=10 ?
P(X ≤ 4) = .9672
n = 10
k 0.01 0.05 0.1 0.2 0.25 0.3 0.4 0.5 0.6 0.7 0.75 0.8 0.9 0.95 0.99
0 0.9044 0.5987 0.3487 0.1074 0.0563 0.0282 0.0060 0.0010 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
1 0.9957 0.9139 0.7361 0.3758 0.2440 0.1493 0.0464 0.0107 0.0017 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000
2 0.9999 0.9885 0.9298 0.6778 0.5256 0.3828 0.1673 0.0547 0.0123 0.0016 0.0004 0.0001 0.0000 0.0000 0.0000
3 1.0000 0.9990 0.9872 0.8791 0.7759 0.6496 0.3823 0.1719 0.0548 0.0106 0.0035 0.0009 0.0000 0.0000 0.0000
4 1.0000 0.9999 0.9984 0.9672 0.9219 0.8497 0.6331 0.3770 0.1662 0.0473 0.0197 0.0064 0.0001 0.0000 0.0000
5 1.0000 1.0000 0.9999 0.9936 0.9803 0.9527 0.8338 0.6230 0.3669 0.1503 0.0781 0.0328 0.0016 0.0001 0.0000
6 1.0000 1.0000 1.0000 0.9991 0.9965 0.9894 0.9452 0.8281 0.6177 0.3504 0.2241 0.1209 0.0128 0.0010 0.0000
7 1.0000 1.0000 1.0000 0.9999 0.9996 0.9984 0.9877 0.9453 0.8327 0.6172 0.4744 0.3222 0.0702 0.0115 0.0001
8 1.0000 1.0000 1.0000 1.0000 1.0000 0.9999 0.9983 0.9893 0.9536 0.8507 0.7560 0.6242 0.2639 0.0861 0.0043
9 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.9999 0.9990 0.9940 0.9718 0.9437 0.8926 0.6513 0.4013 0.0956
Binomial Table…
7.96
• The binomial table gives cumulative probabilities for
𝑃(𝑋 ≤ 𝑘), but as we’ve seen in the last example,
𝑃 𝑋 = 𝑘 = 𝑃 𝑋 ≤ 𝑘 − 𝑃(𝑋 ≤ 𝑘 − 1 )*
• Likewise, for probabilities given as 𝑃(𝑋 ≥ 𝑘), we have:

𝑃 𝑋 ≥ 𝑘 = 1 − 𝑃(𝑋 ≤ 𝑘 − 1 )
* 𝑥 𝑜𝑟 𝑥 : greatest integer function (최대 정수 함수)

𝑥 = 𝑚𝑎𝑥 𝑛 ∈ 𝑍: 𝑛 ≤ 𝑥 ; e.g. 2.5 = 2; cf. Zahlen
Excel Function = BINOMDIST(x, n, p, True(False)) …
7.97
• There is a binomial distribution function in Excel that can
also be used to calculate these probabilities.
• For example: What is the probability that Pat gets two
answers correct?
# successes
# trials
P(success)
Prob. of individual value

of X (i.e. P(X = x)?)
P(X=2)=.3020
Excel Function =BINOMDIST(x, n, p, True(False)) …
7.98
• What is the probability that Pat fails the quiz?
# successes
# trials
P(success)
cumulative
(i.e. P(X ≤ x)?)
P(X ≤ 4)=.9672
7-4d Mean and Variance of a Binomial Distribution
… 7.99
• Statisticians have developed general formulas for the mean, variance,
and standard deviation of a binomial random variable. They are:
𝜇 = 𝑛𝑝
𝜎 2 = 𝑛𝑝(1 − 𝑃)
𝜎= 𝑛𝑝(1 − 𝑝)
• Example 7.11
• If 𝑋~𝐵(10, .2), what is the mean and standard deviation of 𝑋?
• Solution: 𝐸 𝑋 = 𝑛𝑝 = 10 .2 = 2,
𝑉 𝑋 = 10 .2 .8 = 1.6, 𝑠𝑜 𝜎 = 1.6 = 1.26
7-5 Poisson Distribution… 7.100
• Named after Simeon Poisson*, the Poisson distribution is a discrete
probability distribution and refers to the number of events (a.k.a.
successes) within a specific time period or region of space.
* Baron Siméon Denis Poisson (21 June 1781 – 25 April 1840)

• a French mathematician and physicist.
• He worked on statistics, complex analysis,
partial differential equations, the calculus of variations,
analytical mechanics, electricity and magnetism,
thermodynamics, elasticity, and fluid mechanics.
7-5 Poisson Distribution… 7.101
• Example: Poisson random variables
• The number of cars arriving at a service station in 1 hour. (The
interval of time is 1 hour.)
• The number of flaws in a bolt* of cloth. (The specific region is a bolt
of cloth.)
• The number of accidents in 1 day on

a particular stretch of highway.
(The interval is defined by both time,
1 day, and space, the particular stretch of highway.)
* bolt: a roll of cloth or wallpaper of specified length
The Poisson Experiment…
7.102
• Definition 7.18 (Poisson experiment) A Poisson experiment is
characterized by the following properties:
1. The number of successes that occur in any interval is
independent of the number of successes that occur in any other
interval.
2. The probability of a success in an interval is the same for all
equal-size intervals
3. The probability of a success in an interval is proportional to the
size of the interval.
4. The probability of more than one success in an interval
approaches 0 as the interval becomes smaller.
Poisson Distribution…
7.103
• Definition 7.19 (Poisson random variable) The Poisson random
variable is the number of successes that occur in a period of time or
an interval of space in a Poisson experiment.
successes
E.g. On average, 96 trucks arrive at a border crossing every hour.
time period
E.g. The number of typographic errors in a new textbook edition
averages 1.5 per 100 pages.
successes interval
Poisson Probability Distribution… 7.104
• Definition 7.20 (Poisson probability distribution) The probability
that a Poisson random variable assumes a value of x in a
specific interval is
𝑒 −𝜇 𝜇 𝑥
𝑃 𝑥 = 𝑓𝑜𝑟 𝑥 = 0, 1, 2, … ,
𝑥!
where 𝜇 is the mean number of successes in the interval or
region and 𝑒 is the base of the natural logarithm (approximately
2.71828).
• 𝐸 𝑋 =𝑉 𝑋 =𝜇
Example 7.12…
7.105
• A statistics instructor has observed that the number of
typographical errors in new editions of textbooks varies
considerably from book to book.
• After some analysis he concludes that the number of errors is
Poisson distributed with a mean of 1.5 per 100 pages.
• The instructor randomly selects 100 pages of a new book.
What is the probability that there are no typos?
Example 7.12…
7.106
• What is the probability that there are no typos? That is, what
is 𝑃(𝑋 = 0) given that 𝜇 = 1.5?
𝑒 −𝜇 𝜇𝑥 𝑒 −1.5 1.50
𝑃 0 = = = .2231
𝑥! 0!
• There is about a 22% chance of finding zero errors.
Example 7.13… 7.107
• Refer to Example 7.12. Suppose that the instructor has just
received a copy of a new statistics book. He notices that there
are 400 pages.
a. What is the probability that there are no typos?
b. What is the probability that there are five or fewer typos?
Poisson Distribution…
7.108
• As mentioned on the properties of a Poisson experiment:
3. The probability of a success is proportional to the size of
the interval
• Thus, knowing an error rate of 1.5 typos per 100 pages, we

can determine a mean value for a 400 page book as:
𝜇 =(1.5)(4) = 6 typos/400 pages.
Example 7.13…
7.109
• For a 400 page book, what is the probability that there are no
typos?
𝑒 −𝜇 𝜇 𝑥 𝑒 −6 60
𝑃 𝑋=0 = = = .002479
𝑥! 0!
• There is a very small chance that there are no typos.
Example 7.13…
7.110
• For a 400 page book, what is the probability that there are five or less
typos?
𝑃 𝑋 ≤5 =𝑃 0 +𝑃 1 +𝑃 2 +𝑃 3 +𝑃 4 +𝑃 5
𝑒 −6 60 𝑒 −6 61 𝑒 −6 65
= + + ⋯+ = .446
0! 1! 5!
• This is rather tedious to solve manually.

• A better alternative is to refer to Table 2 in Appendix B…(see next slide
of Table 2 Poisson probabilities: 𝜇 = 6)
when 𝑘 = 5, 𝑡ℎ𝑒𝑛 𝑃 𝑋 ≤ 𝑘 = .446
• There is about a 45% chance there are 5 or less typos.
Table 2 Poisson Probabilities… 7.111
• 𝑃 𝑋 ≤ 𝑘 = σ𝑘𝑥=0 𝑝 𝑥 . (Values are rounded to four decimal places.)
Poisson Table… 7.112
• Since the Poisson table gives cumulative probabilities for

𝐹 𝑘 = 𝑃(𝑋 ≤ 𝑘),
𝑃 𝑋 = 𝑘 = 𝑃 𝑋 ≤ 𝑘 − 𝑃(𝑋 ≤ 𝑘 − 1 )
• Likewise, for probabilities given as 𝑃(𝑋 ≥ 𝑘), we have:
𝑃 𝑋 ≥ 𝑘 = 1 − 𝑃(𝑋 ≤ 𝑘 − 1 )
Poisson Table…Example 7.113
• Let 𝑋 denote a random variable that has a Poisson distribution

with mean 𝜇 = 2. Find
a. 𝑃 𝑋 = 4 = 𝑃 𝑋 ≤ 4 − 𝑃 𝑋 ≤ 3 = .947 − .857 = .09

b. 𝑃 𝑋 ≥ 4 = 1 − 𝑃 𝑋 ≤ 3 = 1 − .857 = .143
c. 𝑃 𝑋 < 4 = 𝑃 𝑋 ≤ 3 = .857
𝑃(𝑋≥4, 𝑋≥2) .143 .143 .143
d. 𝑃 𝑋≥4𝑋≥2 = = = = ≈ .2407
𝑃(𝑋≥2) 1−𝑃(𝑋≤1) 1−.406 .594
Example 7.13…Using Excel
7.114
• Excel is even a better alternative. Type the following into any empty
cell:
=POISSON(x, 𝜇, True or False)
7.115
The End of Chapter 7

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• Random Variables(확률변수) and Probability Distributions(확률분포)

• Bivariate Distributions (이변수 분포)

• Binomial Distribution (이항분포)

• Poisson Distribution (포와송분포)

* Chapter opening example will be discussed in the slides 7.70-7.78

Event Characteristics Random

• A continuous random variable is one whose values are

• We have two types of probability distributions:

• For a discrete random variable 𝑋, the probability that 𝑋 takes

# of Persons # of Households (Mil.)

• The probability of each value of X, the number of persons per

• A mutual fund salesperson has arranged to call on three people

• Determine the probability distribution of the number of sales the

• Let C denote success, i.e. closing a sale P(C)=.20

Sales Call 1 Sales Call 2 Sales Call 3

𝑃 𝑥 = 𝐶𝑥3 (.2)𝑥 (.8)3−𝑥 x P(x)

• We can describe the populations by computing various parameters

• It is the weighted average of the squared deviations from the

• The standard deviation of 𝑋, 𝜎 is the positive square root of 𝑉(𝑋).

• Solution: (See the prob. distribution table in ppt 7.16)

• Let 𝑋 be a discrete random variable with the probability function

• Example: Let 𝑔 𝑋 = (𝑋 − 𝜇)2 . Then

𝒙𝒊 𝒑(𝒙𝒊 ) 𝒚𝒋 = 𝒙𝟐𝒊 𝒑 𝒚𝒋 = 𝒑(𝒙𝟐𝒊 )

Find the mean monthly profit.

• Let 𝑋 𝑎𝑛𝑑 𝑌 denote monthly sales and its profit.

• Definition 7.10 (A joint probability distribution of X and Y ) is

1. 0 ≤ 𝑃 𝑥, 𝑦 ≤ 1 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑝𝑎𝑖𝑟𝑠 𝑜𝑓 𝑣𝑎𝑙𝑢𝑒𝑠 (𝑥, 𝑦)

• E.g The probability that Xavier sells 1 house: P(X=1) = 0.50

• Definition 7.11 (Covariance) The covariance of two discrete

or alternatively using this shortcut method:

* covariance: 공분산; coefficient of correlation: 상관계수

• Shortcut method: 𝐶𝑜𝑣 𝑋, 𝑌 = σ𝑎𝑙𝑙 𝑥 σ𝑎𝑙𝑙 𝑦 𝑥𝑦𝑃 𝑥, 𝑦 − 𝜇𝑥 𝜇𝑦

• There is a weak, negative relationship between the two variables.

𝑃 𝑋 + 𝑌 = 2 = 𝑃 0, 2 + 𝑃 1, 1 + 𝑃 2, 0 = .07 + .06 + .06 = .19∎

y 1 .21 .06 .03 .30

• We can create the probability distribution of X+Y:

• 𝐸 𝑋 + 𝑌 = 1 .63 + 2 .19 + 3 .05 + 4 .01 = 1.2 = 𝐸 𝑋 + 𝐸(𝑌)∎

• The joint probability of 𝑃(𝑋 = 𝑥𝑖 , 𝑌 = 𝑦𝑗 ) = 𝑃(𝑥𝑖 , 𝑦𝑗 ):

• If X and Y are independent random variables, the conditional

→ X and Y are uncorrelated(which means they don’t have a linear

Stock Initial Value of investment Rate of return on

𝑔𝑎𝑖𝑛(𝑜𝑟 𝑙𝑜𝑠𝑠) 400

• Notice that the variance and standard deviation of the returns

• The most common procedure is to estimate the parameters from

𝑉 𝑅𝑝 = σ𝑘𝑖=1 𝑤𝑖2 𝜎𝑖2 + 2 σ𝑘−1 𝑘

where 𝑅𝑖 is the return of the 𝑖 𝑡ℎ stock, 𝑤𝑖 is the proportion of the

• To assist you we have created an Excel worksheet to

⇔ An experiment which consists of of 𝑛 independent Bernoulli trials

* Ω: 𝑠𝑎𝑚𝑝𝑙𝑒 𝑠𝑝𝑎𝑐𝑒 (표본공간)

• Example: Flip a coin 10 times:

• A coin flip will result in either heads or tails. If we define

• Other binomial experiment notions:

= 𝑝0 𝑞𝑛 + 𝑛𝑝1 𝑞𝑛−1 + ⋯ + 𝑛𝑝𝑛−1 𝑞1 + 𝑝𝑛 𝑞0

Q1 What is the probability that Pat gets no answers correct?

Q2 What is the probability that Pat gets two answers correct?

• What is the probability that Pat gets no answers correct?

Pat has about an 11% chance of getting no answers correct

• What is the probability that Pat gets two answers correct?

Pat has about a 30% chance of getting exactly two answers

• “Find the probability that Pat fails the quiz”

requires a cumulative probability*, that is, 𝑃(𝑋 ≤ 𝑥).