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Random Variables

Expected Value

And Normal Distributions

Random Variable

Random variable

Outcomes of an experiment expressed

numerically

e.g.: Toss a dice twice; Count the number

of times the number 4 appears (0, 1 or 2

times)

Discrete Random Variable

Obtained by counting (1, 2, 3, etc.)

Usually a finite number of

different values

e.g.: Toss a coin five times;

Count the number of tails

(0, 1, 2, 3, 4, or 5 times)

Discrete Probability

Distribution Example

Event: Toss 2 Coins. Count # Tails.

Probability Distribution

Values Probability

T 0 1/4 = .25

1 2/4 = .50

T

2 1/4 = .25

T T

Discrete Probability Distribution

Xj = value of random variable

P(Xj) = probability associated with value

Collectively exhaustive (nothing left out)

0 P X j 1 P X j 1

Summary Measures

Weighted average of the probability

distribution:

E X X jP X j

j

Summary Measures

continued

Toss two coins, count the number of

tails, compute expected value

X jP X j

j

0 2.5 1 .5 2 .25 1

Summary Measures

(continued

)

Variance

Weight average squared deviation about

the mean

E X X j P X j

2 2 2

Summary Measures

(continued

)

Example of variance:

Toss two coins, count number of tails,

compute variance

X j P X j

2 2

2 2 2

Covariance and its Application

N

XY X i E X Yi E Y P X iYi

i 1

X i : i th outcome of X

Y : discrete random variable

Yi : i th outcome of Y

P X iYi : probability of occurrence of the i th

Computing the Mean for

Investment Returns

Return per $1,000 for two types of investments

Investment

P(XiYi) Economic condition Dow Jones fund X Growth Stock Y

.2 Recession -$100 -$200

.5 Stable Economy + 100 + 50

.3 Expanding Economy + 250 + 350

Computing the Variance for

Investment Returns

Investment

P(XiYi) Economic condition Dow Jones fund X Growth Stock Y

.2 Recession -$100 -$200

.5 Stable Economy + 100 + 50

.3 Expanding Economy + 250 + 350

2 2 2 2

X

.2 200 90 .5 50 90 .3 350 90

2 2 2 2

Y

37,900 Y 194.68

Important Discrete

Probability Distributions

Discrete Probability

Distributions

The Binomial Random Variable

– An experiment of n identical trials

– 2 possible outcomes on each trial, denoted as

S( success) and F( failure)

– Probability of success (p) is constant from trial

to trial. Probability of failure (q) is 1-p

– Trials are independent

– Binomial random variable – number of S’s in n

trials

The Binomial Random Variable

(L) PCs online. Sales of 80% desktop, 20% laptop.

What is the probability that next 4 sales are

Laptops?

Sample points for next 4 online

purchases

DDDD LDDD LLDD DLLL LLLL

DLDD LDLD LDLL

DDLD LDDL LLDL

DDDL DLLD LLLD

DLDL

DDLL

The Binomial Random Variable

the possible outcomes

P(DDDD) = .8*.8*.8*.8=.84=.4096

P(LDDD) = .2*.8*.8*.8=.2*.83=.1024

…..

P(LLLL) = .2*.2*.2*.2=.24=.0016

The Binomial Random Variable

sales are laptops?

P(3 of the next 4 customers purchase laptops) =

4(.2)3(.8)=4(.0064) = .0256

What is the probability that 3 of the next 4 online

sales are desktops?

P(3 of the next 4 customers purchase desktops) =

4(.8)3(.2)=4(.1024) = .4096

The Binomial Random Variable

n

p( x ) =

x

x n −x

• p q

Where p = probability of success on single trial

q = 1-p

n = Number of trials

x = number of successes in n trials

n n!

=

x x!(n − x)!

The Binomial Random Variable

Mean: µ = np

Variance: σ = npq

2

The Binomial Random Variable

Binomial tables are cumulative tables, entries

represent cumulative binomial probabilities

Make use of additive and complementary

properties to calculate probabilities of individual

x’s, or x being greater than a particular value.

The Binomial Random Variable

If x < 2, and p =.2, n =10, then P(x<2) =.678

If x = 2, and p =.2, n =10, then P(x=2) = P(x<2) - P(x<1)=.678-.376 = .302

If x >2, and p = .2, n =10, then P(x>2) = 1- P(x<2) =1-.678 = .322

p

k .01 .05 .10 .20 .30

0 .904 .599 .349 .107 .028

1 .996 .914 .736 .376 .149

Expected Values of Discrete

Random Variables

Probability Rules for a Discrete Random Variable

Chebyshev’s Rule Empirical Rule

distribution shaped and symmetric

distributions

P( µ − σ < x < µ + σ ) ≥0 ≈ .68

P ( µ − 2σ < x < µ + 2σ ) ≥3 4 ≈ .95

P ( µ − 3σ < x < µ + 3σ ) ≥8 9 ≈ 1.00

Poisson Distribution

Poisson process ( =x|λ

PX

-λ x

Discrete events in an “interval” e λ

The probability of one success

in an interval is stable x!

The probability of more than

one success in this interval is 0

The probability of success is

independent from interval to

interval

e.g.: The number of customers arriving in 15

minutes

e.g.: The number of defects per case of light

bulbs

Poisson Distribution

Characteristics

Mean .6

P(X) λ = 0.5

E X .4

.2

N 0 X

XiP Xi 0 1 2 3 4 5

i 1

.6

P(X) λ =6

Standard deviation .4

.2

and variance 0 X

2 0 2 4 6 8 10

Poisson Probability

Distribution Function

X

e

P X

X!

P X : probability of X "successes" given

X : number of "successes" per unit

: expected (average) number of "successes"

e : 2.71828 (base of natural logs)

e.g.: Find the probability of four e 3.6 3.64

P X .1912

customers arriving in three 4!

minutes when the mean is 3.6.

Continuous Random Variables

Continuous Probability Distributions

curve correspond to probabilities for x

Area A corresponds to the probability that x lies

between a and b

Do you see the similarity in shape between the continuous and discrete

probability distributions?

The Normal Distribution

Symmetrical

Mean, median and

mode are equal X

µ

Interquartile range

Mean

equals 1.33 σ Median

Random variable Mode

The Mathematical Model

1

1 X 2

f X

2

e

2 2

f X : density of random variable X

3.14159; e 2.71828

: population mean

: population standard deviation

X : value of random variable X

The Normal Distribution

distribution called a normal distribution

Bell-shaped curve

Symmetrical about its mean μ

Spread determined by the value

of it’s standard deviation σ

The Normal Distribution

flatness and center of the curve, but not the

basic shape

The Normal Distribution

Probabilities associated with values or ranges of a random

variable correspond to areas under the normal curve

Calculating probabilities can be simplified by working with a

Standard Normal Distribution

A Standard Normal Distribution is a Normal distribution with

µ =0 and σ =1

The standard normal

random variable is

denoted by the

symbol z

The Normal Distribution

Table for Standard Normal Distribution contains probability

for the area between 0 and z

Partial table below shows components of table

Probability

associated with a

particular z value, in

Value of z a this case z=.13,

combination of p(0<z<.13) = .0517

column and

row Z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09

.0 .0000 .0040 .0080 .0120 .0160 .0199 .0239 .0279 .0319 .0359

.1 .0398 .0438 .0478 .0517 .0557 .0596 .0636 .0675 .0714 .0753

.2 .0793 .0832 .0871 .0910 .0948 .0987 .1026 .1064 .1103 .1141

.3 .1179 .1217 .1255 .1293 .1331 .1368 .1406 .1443 .1480 .1517

Many Normal Distributions

There are an infinite number of normal

distributions

obtain different normal distributions

Finding Probabilities

Probability is

the area

under the P c X d ?

curve!

f(X)

X

c d

Which Table to Use?

means an infinite number of tables to look

up!

Solution: The Cumulative Standardized

Normal Distribution

Cumulative Standardized

Normal Distribution Table

(Portion) Z 0 Z 1

Z .00 .01 .02

.5478

0.0 .5000 .5040 .5080

Shaded

Area

0.1 .5398 .5438 .5478 Exaggerate

d

0.2 .5793 .5832 .5871 0

Probabilities

0.3 .6179 .6217 .6255 Z = 0.12

The Normal Distribution

Table gives us area A1

Symmetry about the mean

tell us that A2 = A1

P(-1.33 < z < 1.33) = P(-1.33 < z < 0) +P(0 < z < 1.33)=

A2 + A1 = .4082 + .4082 = .8164

The Normal Distribution

Table gives us area A1

Symmetry about the mean

tell us that A2 = .5

The Normal Distribution

Table gives us area .5 - A2

=.4750, so A2 = .0250

Symmetry about the mean

tell us that A2 = A1

P(|z| > 1.96) = A1 + A2 = .0250 + .0250 =.05

The Normal Distribution

not normalized? We want to know

P (8<x<12), with μ=10 and σ=1.5

Convert to standard normal using

x−µ

z=

σ

P(8<x<12) = P(-1.33<z<1.33) = 2(.4082) = .8164

Solution: The Cumulative

Standardized Normal

Distribution

Cumulative Standardized

Normal Distribution Table

(Portion) Z 0 Z 1

Z .00 .01 .02

.5478

0.0 .5000 .5040 .5080

Shaded

Area

0.1 .5398 .5438 .5478 Exaggerate

d

0.2 .5793 .5832 .5871 0

Probabilities

0.3 .6179 .6217 .6255 Z = 0.12

Standardizing Example

X 6.2 5

Z 0.12

10

Normal Standardized

Distribution Normal

10 Distribution

Z 1

6.2 X 0.12 Z

5 Z 0

Shaded Area Exaggerated

Example:

P 2.9 X 7.1 .1664

X 2.9 5 X 7.1 5

Z .21 Z .21

10 10

Normal Standardized

Distribution Normal

10 Distribution

.0832 Z 1

.0832

5 Z 0

Shaded Area

Example:

P 2.9 X 7.1 .1664(continued

)

Cumulative Standardized

Normal Distribution Table Z 0 Z 1

(Portion)

Z .00 .01 .02

.5832

0.0 .5000 .5040 .5080 Shaded

Area

0.1 .5398 .5438 .5478 Exaggerate

d

0.2 .5793 .5832 .5871 0

Z = 0.21

0.3 .6179 .6217 .6255

Example:

P 2.9 X 7.1 .1664(continued

)

Cumulative Standardized

Normal Distribution Table Z 0 Z 1

(Portion)

Z .00 .01 .02 .4168

-03 .3821 .3783 .3745 Shaded

Area

-02 .4207 .4168 .4129 Exaggerate

d

-0.1 .4602 .4562 .4522 0

Z = -0.21

0.0 .5000 .4960 .4920

Example:

P X 8 .3821

X 85

Z .30

10

Normal Standardized

Distribution Normal

10 Distribution

Z 1

.3821

8 X 0.30 Z

5 Z 0

Shaded Area

Example:

P X 8 .3821 (continued

)

Cumulative Standardized

Normal Distribution Table Z 0 Z 1

(Portion)

Z .00 .01 .02 .6179

0.0 .5000 .5040 .5080 Shaded

Area

0.1 .5398 .5438 .5478 Exaggerate

d

0.2 .5793 .5832 .5871 0

Z = 0.30

0.3 .6179 .6217 .6255

Finding Z Values for Known

Probabilities

Cumulative Standardized

What is Z Given Normal Distribution Table

Probability = (Portion)

0.1217 ?

Z 0 Z 1 Z .00 .01 0.2

.6217

0.1 .5398 .5438 .5478

0

Shaded 0.3 .6179 .6217 .6255

Area Z .31

Exaggerat

Recovering X Values for Known

Probabilities

Normal Standardized

Distribution Normal

10 Distribution

.6179 Z 1

.3821

X

5 ? Z 0

0.30 Z

X Z 5 .30 10 8

The Normal Distribution

Normal Random Variable

•Sketch the distribution, locate mean, shade area

of interest

x−µ

•Convert to standard z values using z =

σ

•Add z values to the sketch

•Use tables to calculate probabilities, making use

of symmetry property where necessary

The Normal Distribution

variable x with mean 100000 and

standard deviation of 10000, what

value of x identifies the top 10%

of the distribution?

x0 − µ x0 − 100,000

P ( x ≤ x0 ) = P z ≤ = P z ≤ = .90

σ 10,000

The z value corresponding with .40 is 1.28. Solving for x0

x0 = 100,000 +1.28(10,000) = 100,000 +12,800 = 112,800

Assessing Normality

normally distributed

It is important to evaluate how well the data

set seems to be adequately approximated

by a normal distribution

Assessing Normality

(continued

)

Construct charts

For small- or moderate-sized data sets, do

stem-and-leaf display and box-and-whisker

plot look symmetric?

For large data sets, does the histogram or

polygon appear bell-shaped?

Compute descriptive summary measures

Do the mean, median and mode have similar

values?

Is the interquartile range approximately 1.33 σ?

Is the range approximately 6 σ?

Assessing Normality

(continued

)

Observe the distribution of the data set

Do approximately 2/3 of the observations lie

between mean 1 standard deviation?

Do approximately 4/5 of the observations lie

between mean 1.28 standard deviations?

Do approximately 19/20 of the observations lie

between mean 2 standard deviations?

Evaluate normal probability plot

Do the points lie on or close to a straight line

with positive slope?

Assessing Normality

(continued

)

Normal probability plot

Arrange data into ordered array

Find corresponding standardized normal

quantile values

Plot the pairs of points with observed data

values on the vertical axis and the

standardized normal quantile values on the

horizontal axis

Evaluate the plot for evidence of linearity

Assessing Normality

(continued

)

Normal Probability Plot

for Normal Distribution

90

X 60

30 Z

-2 -1 0 1 2

Normal Probability Plot

Left-Skewed Right-Skewed

90 90

X 60 X 60

30 Z 30 Z

-2 -1 0 1 2 -2 -1 0 1 2

Rectangular U-Shaped

90 90

X 60 X 60

30 Z 30 Z

-2 -1 0 1 2 -2 -1 0 1 2

Example

e.g.: Customers arrive at the check out

line of a supermarket at the rate of 30

per hour. What is the probability that

the arrival time between consecutive

customers to be greater than 5

minutes?

30 X 5 / 60 hours

P arrival time >X 1 P arrival time X

1 1 e

30 5 / 60

.0821

Descriptive Methods for Assessing

Normality

•Evaluate the shape from a histogram or

stem-and-leaf display

•Compute intervals about mean x ± s, x ± 2s, x ± 3s

and corresponding percentages

•Compute IQR and divide by standard

deviation. Result is roughly 1.3 if normal

•Use statistical package to evaluate a

normal probability plot for the data

Approximating a Binomial Distribution with a

Normal Distribution

approximation of a Binomial Distribution for large

values of n

Often needed given limitation of binomial tables

Need to add a correction for continuity, because of

the discrete nature of the binomial distribution

Correction is to add .5 to x when converting to

standard z values

Rule of thumb: interval µ+3σ should be within

range of binomial random variable (0-n) for normal

distribution to be adequate approximation

Approximating a Binomial Distribution with a

Normal Distribution

Steps

Determine n and p for the binomial distribution

Calculate the interval µ ± 3σ = np ± 3 npq

Express binomial probability in the form P(x<a) or

P(x<b)–P(x<a)

Calculate z value for each a, applying continuity

correction

Sketch normal distribution, locate a’s and use table

to solve

Approximating a Binomial Distribution with a

Normal Distribution

approximation of a Binomial Distribution for large

values of n

Often needed given limitation of binomial tables

Need to add a correction for continuity, because of

the discrete nature of the binomial distribution

Correction is to add .5 to x when converting to

standard z values

Rule of thumb: interval µ+3σ should be within

range of binomial random variable (0-n) for normal

distribution to be adequate approximation

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