Lecture 4: Probability Theory and Random Variables
– Each simple event must belong to either A
or . Since the sum of the probabilities assigned to a simple event is one, we have for any event A P(A) = 1 P(A) P(A) = 1 -- P(A)
– For any two events A and B
P(A P(A or B) = P(A) + P(B) P(A and B) P(A) =6/13 or B) = P(A) + P(B) -- P(A and B)
P(B) =5/13 _ A B A or B
A and B) =3/13 (A or B) = 8/13
– For any two events A and B
P(A and B) = P(A)P(B|A) P(A and B) = P(A)P(B|A) = P(B)P(A|B) = P(B)P(A|B)
– When A and B are independent
P(A and B) P(A and B)
= P(A)P(B) = P(A)P(B)
• Example 6.3
– A stock market analyst feels that the probability that a certain mutual fund will receive increased contributions from investors is 0.6. the probability of receiving increased contributions from investors becomes 0.9 if the stock market goes up. the probability of receiving increased contributions from investors drops below 0.6 if the stock market drops. there is a probability of 0.5 that the stock market rises. – The events of interest are:
A: The stock market rises; B: The company receives increased contribution.
the following probabilities
– The probability that both A and B will occur is
P(A and B). [Sharp increase in earnings]. – The probability that either A or B will occur is P(A or B). [At least moderate increase in earning]. – Solution
P(A) = 0.5; P(B) = 0.6; P(B|A) = 0.9 P(A and B) = P(A)P(B|A) = (.5)(.9) = 0.45 P(A or B) = P(A) + P(B) - P(A and B) = .5 + .6 - .45 =0.65
Random Variables and Probability Distributions
random experiment is a function that assigns a numerical value to each simple event in a sample space. A random variable reflects the aspect of a random experiment that is of interest to us. There are two types of random variables
– Discrete random variable – Continuous random variable.
Discrete and Continuous Random Variables
A random variable is discrete if it can assume only A random variable is discrete if it can assume only a countable number of values. A random variable a countable number of values. A random variable is continuous if it can assume an uncountable is continuous if it can assume an uncountable number of values. number of values. iscrete random variable Continuous random variable
After the first value is defined After the first value is defined, the second value, and any value any number can be the next one thereafter are known.
1/16 3 ... 0 1/4
Therefore, the number of values is countable
Therefore, the number of values is uncountable
Discrete Probability Distribution
table, formula, or graph that lists all possible values a discrete random variable can assume, together with associated probabilities, is called a discrete probability distribution..
– To calculate P(X = x), the probability that the
random variable X assumes the value x, add the probabilities of all the simple events for which X is equal to x.
– Find the probability distribution of the random
variable describing the number of heads that turn-up when a coin is flipped twice. – Solution
Simple event HH 2 HT 1 TH 1 TT 0 x Probability
1/4 1/2 1/4
1/4 0 1/4 if x=0 or 2 1/4 1 p(x) = 1/4 2 1/4 1/2 if x=1
of discrete probability
– If a random variable can take values xi, then the
following must be true:
1. 0≤ p(x) ≤ 1forallxi i
∑ p(x ) = 1
The probability distribution can be used to calculate probabilities of different events. Example continued:
1 1 3 P(1≤ X ≤ 2) = P(X = 1 + P(X = 2) = + = ) 2 4 4
as relative frequencies
– In practice, often probabilities are estimated from
relative frequencies – Example
The number of cars a dealer is selling daily were recorded in the last 100 days. This data was summarized as follows: Daily sales Frequency Estimate the probability 0 5 distribution. 1 15 State the probability of 2 35 selling more than 2 cars a 3 25 day. 4 20
– From the table of frequencies we can calculate
the relative frequencies, which becomes our estimated probability distribution .35
Daily sales Relative Frequency .20 .15 0 5/100=.05 1 15/100=.15 .05 2 35/100=.35 X 0 1 2 3 4 3 25/100=.25 4 20/100=.20 The probability of selling 1.00 more than 2 a day is P(X>2) = P(X=3) + P(X=4) = .25 + .20 = .45 13
6.5 Expected Value and Variance
– Given a discrete random variable X with values xi,
that occur with probabilities p(xi), the expected value of X is
xi ⋅ p(xi )
The expected value of a random variable X is the weighted average of the possible values it can assume, where the weights are the corresponding probabilities of each xi.
Laws of Expected Value
¤ E(c) = c ¤ E(cX) = cE(X) ¤ E(X + Y) = E(X) + E(Y)
E(X - Y) = E(X) - E(Y) ¤ E(XY) = E(X)E(Y) if X and Y are independent random variables.
– Let X be a discrete random variable with
possible values xi that occur with probabilities p(xi), and let E(xi) = µ . The variance of X is defined to be
σ 2 = E (X − µ)2 =
(xi − µ)2p(xi )
The variance is the weighted average of the squared deviations of the values of X from their mean µ , where the weights are the corresponding probabilities of each xi.
– The standard deviation of a random variable X,
denoted σ , is the positive square root of the variance of X.
– The total number of cars to be sold next week is
described by the following probability distribution
x p(x) 0 .05 1 .15 2 .35 3 .25 4 .20
– Determine the expected value and standard
deviation of X, the number of cars sold.
E( X ) = µ = ∑
x xi p( xi ) p(x)
= 0(0.05) + 1(0.15) + 2(0.35) + 3(0.25) + 4(0.20) = 2.40 V ( X ) = σ 2 = ∑ ( xi − 2.4) 2 p ( xi )
i =1 5
= (0 − 2.4) 2 (.05) + (1 − 2.4) 2 (.15) + ( 2 − 2.4) 2 (.35) + (3 − 2.4) 2 (.25) + ( 4 − 2.4) 2 (.20) = 1.24
σ = 1.24 = 1.11