Professional Documents
Culture Documents
PGDM(2017-19)
Term-II (Sep-Dec,2017)
Kakali Kanjilal
Associate Professor, Operations
IMI, Delhi
Continuous Probability
Distributions:
Normal Distribution
f (x)
Normal
x
Continuous Probability Functions
probability is height
0 0.125 0.3
P(x)
1 0.375 0.2
0.1
2 0.375 0.0
0 1 2 3
3 0.125 C1
1.000
Discrete and Continuous Random
Variables - Revisited
A continuous random variable:
measures (e.g.: height, weight, speed, value, duration,
length)
has an uncountably infinite number of possible values
values
probability is area
M in u te s to C o m p le te T a s k
0.3
For example:
In this case, the shaded area 0.2
minutes. M in ute s
From a Discrete to a Continuous
Distribution
The time it takes to complete a task can be subdivided into:
Eighth-Minute Intervals (0.125)
Half-Minute (0.5) Intervals Quarter-Minute (0.25)Intervals
Minutes to C omplete T as k: B y Half-Minutes Minutes to C omplete Task: F ourths of a Minute Minutes to Complete Task: Eighths of a Minute
0.15
0.10
P(x)
P(x)
P(x)
0.05
0.00
0.0
. 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7
Minutes Minutes Minutes
F(b)
F(a)
} P(a X b)=F(b) - F(a)
0
a b x
f(x)
x
0 a b
Continuous Random Variables
A continuous random variable is a random variable that can take
on any value in an interval of numbers.
F(x) = P(X x) =Area under f(x) between the smallest possible value of X (often -
) and the point x.
Normal Probability Distribution
As n increases, the binomial distribution approaches a ...
n=6 n = 10 n = 14
B inomial D is tribution: n= 6, p= .5 B inomial D is tribution: n= 1 0 , p= .5 B inomial D is tribution: n= 1 4 , p= .5
P (x)
P (x)
0.1 0.1 0.1
x - 2
-
0.3
e 2 2
f(x)
f ( x) = - < x<
0.2
1 for 0.1
2p 2 0.0
Standard Deviation
Mean x
Normal Probability Distribution
Characteristics
The distribution is symmetric; its skewness measure is
zero.
x
Normal Probability Distribution
Characteristics
The highest point on the normal curve is at the
mean, which is also the median and mode.
x
Mean=Median=Mode
Mean, Median and Mode
The mean (or average) of a set of data values is the sum of all of the data values divided by the number of data values.
The median of a set of data values is the middle value of the data set when it has been arranged in ascending order. That is,
from the smallest value to the highest value.
Median = (n+1)th value; n is the number of data values in the sample
If the number of values in the data set is even, then the median is the average of the two middle values.
- Half of the values in the data set lie below the median and half lie above the median
- The median is the most commonly quoted figure used to measure property prices. The use of the median avoids the
problem of the mean property price which is affected by a few expensive properties that are not representative of the
general property market.
The mode of a set of data values is the value(s) that occurs most often.
- It is possible for a set of data values to have more than one mode.
I- f there are two data values that occur most frequently, we say that the set of data values is bimodal.
If there is no data value or data values that occur most frequently, we say that the set of data values has no mode.
The mean, median and mode of a data set are collectively known as measures of central tendency as these three measures
focus on where the data is centred or clustered. To analyse data using the mean, median and mode, we need to use the
most appropriate measure of central tendency. The following points should be remembered:
The mean is useful for predicting future results when there are no extreme values in the data set. However, the impact of
extreme values on the mean may be important and should be considered. E.g. The impact of a stock market crash on
average investment returns.
The median may be more useful than the mean when there are extreme values in the data set as it is not affected by the
extreme values.
The mode is useful when the most common item, characteristic or value of a data set is required.
Normal Probability Distribution
Characteristics
The mean can be any numerical value: negative,
zero, or positive.
Different Mean , Same Standard Deviation
-10 0 25
x
Normal Probability Distribution
Characteristics
The standard deviation determines the width of the
curve: larger values result in wider, flatter curves.
Normal Probability Distribution
Characteristics
Probabilities for the normal random variable are
given by areas under the curve. The total area
under the curve is 1 (.5 to the left of the mean and
.5 to the right).
.5 .5
Properties of Normal Probability
Distribution
The normal is a family of
Bell-shaped and symmetric distributions.
Because the distribution is symmetric, one-half (.50 or 50%)
lies on either side of the mean.
x
+ 3
3 1 + 1
2 + 2
Normal Probability Distribution
Characteristics (basis for the empirical rule)
0.3
f(w)
f(x)
f(y)
0.2 0.1 0.1
0.1
0.2
Z~N(0,1)
Standard Normal Probability
Distribution
Characteristics
A random variable having a normal distribution
with a mean of 0 and a standard deviation of 1 is
said to have a standard normal probability
distribution.
The letter z is used to designate the standard
normal random variable: Z=(x- )/
=1
=0
z
Example: Demand at Gas Station
Suppose that at a gas station the daily demand for regular
gasoline is normally distributed with a mean of 1,000 gallons
and a standard deviation of 100 gallons.
The station manager has just opened the station for business
and notes that there is exactly 1,100 gallons of regular
gasoline in storage.
P (x < 1,100)
P(X<=1000)=0.5
So, P(X<=1100) = 0.5+0.3413 = 0.8413
0.2 0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
0.1 1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.56 1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
{
1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015
0.0 1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
-5 -4 -3 -2 -1 0 1 2 3 4 5 1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
Z 1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817
The store manager is concerned that sales are being lost due to
stock-outs while waiting for a replenishment order.
Step 2: To find P(Z > 0.83) , we need to first find the area
under the standard normal curve to the left of z = .83.
Problem: Pep Zone
using Standard Normal Prob Table
P ( z > 0.83) = 1- (0.5+0.2967)=1-0.7967=0.2033
Probability of no Probability of a
Stock-out during Stock-out during
replenishment replenishment
lead-time = lead-time =
P(z<=0.83)= .7967 P(Z>0.83)=0.2033
z
0 .83
Problem: Pep Zone
HINT: Given a probability, we can use the standard normal table in an inverse
fashion to find the corresponding z value.
In earlier case we moved from X to Z, here we would first find Z for a
corresponding probability which is 0.05 now and then Z, next we will move
forward from Z to X.
Problem: Pep Zone
Solving for the Reorder Point
Area = .0500
z
0 z.05
P(Z > zA) = 0.05=> P(Z<= zA ) = 0.5-0.05 => P(Z<= zA ) = 0.45;
So, looking up the table , Z= 1.64 gives prob 0.45.
Problem: Pep Zone
Solving for the Reorder Point
x = + z.05
= 15 + 1.645(6)
= 24.87 or 25
Probability of no
Probability of a
Stock-out during
Stock-out during
replenishment
replenishment
lead-time = .95
lead-time = .05
x
15 24.87
Problem: Pep Zone
Solving for the Reorder Point
= .1587
Standard Normal Probability
Notice that the largest value of z in the table is 3.09, and
that P( Z < 3.09) = .9990. This means that
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CASE: DAILY SENSEX RETURN
How should he proceed to get the following answers?
1. Does the daily return of SENSEX follow a normal distribution?
How do you derive this information?
2. What are average daily return and its variation?
3. What is the chance that return is negative?
4. What are the two values for which Arin can be 95% sure that the daily
return would lie between these values?
5. Does this help Arin in his decision?
6. If yes, explain the reasons. If not, what additional information does
Arin require? Should he seek advice from market analyst?
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Solution
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