Exercise 1

An investor is considering three strategies for a €1200 of investment. The

probable returns are estimated as follows:
- Strategy 1: A profit of 10000$ with probability 0.15 and a loss of
1000$ with probability 0.85
- Strategy 3: A profit of 1000$ with probability 0.50, profit of 500$
with probability 0.30, and a loss of 500$ with probability 0.20
- Strategy 3: A certain profit of 400$
Which strategy has the highest expected profit? Explain why you would or
would not advise the investor to adopt this strategy.

Answers:

X = “Profit for strategy 1”

Y = “Profit for strategy 2”
Z = “Profit for strategy 3”
E(X) = 10000*0.15-1000*0.85=650$
E(Y)= 1000*0.5+500*0.3-500*0.2= 550$
E(Z)=400$

V ( X )=E( X 2 )−[ E ( X ) ] =∑ x 2 P ( x )−μ2x= 100 . 000. 000⋅0 ,15+1 . 000 .000⋅0 , 85−650 2
2

¿ 15 .000 . 000+850 . 000−422. 500=15 . 427 . 500

V (Y )=E(Y 2 )−[ E ( Y ) ] =∑ y 2 P( y )−μ2y = 1. 000 . 000⋅0,5+250 . 000⋅0,2−5502

2

¿ 500. 000+75 . 000−50 . 000−302. 500=322 .500

2
V (Z )=E( Z 2 )−[ E ( Z ) ] =160 .000−160 .000=0

The third strategy is the one with the lowest expected profit, but without
variance in the result.
Exercise 2

Consider a Random Variable X = “Result of a 6 sided die”.

a) Compute the probability of X > 3.
b) Which is E(X)?
c) Which is V(X)?

Answers:
a)
X = “Result of a 6 sided die”, it is distributed with a uniform discrete
distribution, k = 6.

P(X>3) = 1 – F(3) = 1 – 3/6 = 0.5

b) E(X) = 1*1/6+2*1/6+3*1/6+4*1/6+5*1/6+6*1/6=3.5
(we can use also the result of the uniform discrete distribution, E(X) =
(k+1)/2 = 7/2 = 3.5)

c) V(X) = 1*1/6+4*1/6+9*1/6+16*1/6+25*1/6+36*1/6-(7/2) 2=
= 91/6 – 49/4 = 182/12 – 147/12 = 35/12 = 2.92
(we can use also the result of the uniform discrete distribution, V(X) = (k 2-
1)/12 = 35/12 = 2.92)

Exercise 3

An evaluation test is made by 20 multiple choice questions, each one with 4

possible answers (only one answer is correct). Suppose that the answers to
the questions are random and independent.
a) Considering the result of only one question, which distribution could you
use? Write its probability function, its expectation and its variance.
b) If we want to consider the number of exact answers given in a test,
supposing a random approach, which distribution could you use? Write the
expression of the probability function and the values assumed by the
parameters in this example.
c) Compute the expectation and the variance of the final result of the exam
assuming that all the questions are randomly chosen.
d) Which is the probability to have a final result of 0?
e) Which is the probability to have at least half of the questions correct, if
you know for sure the correct answer to 7 of them?
Answers:
a) Y = “Number of correct answers for 1 question”, it is a Bernoulli
distributed random variable with p = 0.25

Y ~ Bernoulli (0. 25)

Y p(y)
0 0.75
1 0.25

E(Y)=p=0.25
V(Y)=p(1-p)=0.25*0.75=0.1875

b) X ~ Binomial (20, 0.25)

( 20x ) 0.25 0.75

p ( x )=
x 20− x

c) E(X)= np = 20*0.25 = 5
V(X)= np(1-p)= 20*0.25*0.75= 3.75

(20 )
d) P(X = 0) = 0 0.25 0.75
0 20−0
= 0.7520 = 0.00317 = 0.317%
e) n=20-7=13 ; x=10-7=3
13
( )
3 13−3
P(X=3)= 3 0.25 0.75 =21772800*0.01562*0.05631=0,2516

Exercise 4

Compute mean and variance of a variable with a Bernoulli distribution of

parameter p = 0.8.

Answers:
Mean and variance of a Bernoulli random variable with p = 0.8:
μ x =E ( X )=∑ xp ( x ) =( 0 ) ( 1− p ) + ( 1 ) p= p=0.8

σ 2x =E [ ( X−μ x )2 ]=∑ ( x−μx )2 p( x)=( 0− p )2 ( 1− p ) + ( 1−p )2 p=p (1− p)

σ 2x =V ( X ) =p ( 1−p )=0.8 ( 1−0.8 )=0.16

Exercise 5

For a binomial distribution probability with p = 0.4 and n = 10, find the
probability that the number of successes is equal to 5 and the probability
that the number of successes is fewer than 2.

Answers:

Probability of a binomial random variable with p = 0.4 and n = 10, x = 5 and x

less than 2
n x
() n−x 10 5
( )
10−5
P(5 sales) = x p (1− p) =¿ 5 0.4 0.6 =¿ 504 * 0.01024 * 0.07776 = 0.4013

(105)= 5 ! ( 10−5
10 !
=
10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1
) ! ( 5 x 4 x 3 x 2 x 1 ) (5 x 4 x 3 x 2 x 1)
=504

P (fewer than 2 sales) = P(X = 0) + P(X = 1)

P(X = 0) = 1 x 1 x (.6)^10 = 0.00604
P(X = 1) = 10 x 0.4 x 0.010077696 = 0.04031
P( X < 2) = 0.00604 + 0.04031 = 0.04635

Exercise 6

SparkSolutions, a video surveillance systems producer in Italy, installs new

security cameras had has found for 17% of all installations, a return visit is
needed to make some modifications. Five installations were made in a
particular week. Assume independence of outcomes for these installations.

a) What is the probability that a return visit will be needed in all these
cases?
b) What is the probability that a return visit will be needed in none of these
cases?
c) What is the probability that a return visit will be needed in more than 1
of these cases?

Answers:
a) Probability Distribution Function
Binomial with n = 5 and p = 0.17

x p(x) = P( X = x)
0 0.393904064
1 0.403395729
2 0.165246443
3 0.033845657
4 0.003466122
5 0.000141986
 ()
n x n−x 5 5
() 5−5
P(X=5)= x p (1− p) =¿ 5 0.17 (0.83) =¿ 0.175 = 0.0001419

b) ()
n x n− x 5 0
() 5−0
P(X=0) ¿ x p (1− p) =¿ 0 0.17 (0.83) =¿ 0.835 =0.3939

c) P (X>1)=1-P(X=0)-P(X=1)=1-0.3939-0.4033=1-0.7972=0.2028

P(X=1)= ( nx) p (1− p)

x n−x
=¿ (51) 0.17 (0.83)
1 5−1
=
120
1 x 24
0.17(0.83)4 =¿

5*0.17*0.4745=0.4033

Exercise 7

A campus finance officer finds that, for all parking tickets issued, fines are
paid for 78% of the tickets. The fine is 2$. In the most recent week, 620
parking tickets have been issued.

a) Find the mean and the standard deviation of the number of these tickets
for which the fines will be paid.
b) Find the mean and the standard deviation of the amount of money that
will be obtained from the payment of these fines.

Answers:

a) X ~ Bin(n = 620, p = 0.78)

E(X) = np = 620*0.78= 483.6 ≅ 484

V(X) = np(1-p)=620*0.78*0.22=106.392
σX = 10.3147

b) Z = 2X

E(Z) = 2E(X) = 967.2$

V(Z) = 4V(X) = 425.568
σZ = 20.6293$

Exercise 8
A family of mutual funds maintains a service that allows clients to switch
money among accounts through a telephone call. It was estimated that
3.2% of callers either get a busy signal or are kept on hold so long that they
may hang up. Fund management assesses any failure of this sort as a $10
goodwill loss. Suppose that 2000 calls are attempted over a particular
period.

a) Find the mean and standard deviation of the number of callers who will
either get a busy signal or may hang up after being kept on hold
b) Find the mean and standard deviation of the total goodwill loss to the
mutual fund company from these 2000 calls.

Answers:
a) X ~ Bin(0.032,2000)

E(X) = 2000*0.032 = 64
V(X) = 2000*0.032*0.968=61.952
σX = 7.8710

b) Z = 10X

E(Z) = 10E(X) = 640$

V(Z) = 100V(X) = 6195.2
σZ = 78.71$

Exercise 9

Assume that 13% of people are left-handed. If we select 5 people at

random, find the probability of each outcome below:

a) There are exactly 3 lefties in the group

b) There are some lefties among the 5 people
c) There are more than 3 lefties in the group
Answers:
(5 )
a) x=3  P(3)= 3 0.1330.872=0.0166

b) At least 1 person is leftie  the complement of all right handed (0 lefties)

 1−P(0)=1−0.875=0.5016

( 5) (5 )
c) P(x>3)  P(4)+P(5)= 4 0.1340.875-4 + 5 0.135 0.875-5 =
=5*0.1340.87+0.135=0.0012+0.000037=0.001237