Statistics for Managers

Using Microsoft® Excel

4th Edition

Chapter 5

Some Important Discrete

Probability Distributions

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-1
 Chapter Goals

After completing this chapter, you should be able

to:
 Compute the mean and standard deviation for a
discrete probability distribution
 Use the binomial, hypergeometric and Poisson
discrete probability distributions to find
probabilities
 Describe when to apply the binomial,
hypergeometric and Poisson distributions

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-2
 Introduction to Probability
Distributions
 Random Variable
 Represents a possible numerical value from
an uncertain event
Random
Variables

Ch. 5 Discrete Continuous Ch. 6

Random Variable Random Variable

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-3
 Discrete Random Variables
 Can only assume a countable number of values

Examples:

 Roll a die twice

Let X be the number of times 4 comes up
(then X could be 0, 1, or 2 times)

 Toss a coin 5 times.

Let X be the number of heads
(then X = 0, 1, 2, 3, 4, or 5)
Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-4
 Discrete Probability Distribution

Experiment: Toss 2 Coins. Let X = # heads.

4 possible outcomes
Probability Distribution
T T X Value Probability
0 1/4 = .25
T H 1 2/4 = .50
2 1/4 = .25

H T
Probability

.50

.25
H H
0 1 2 X
Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-5
 Discrete Random Variable
Summary Measures
 Expected Value of a discrete distribution
(Weighted Average)

 Example: Toss 2 coins, X P(X)

0 .25
X = # of heads, 1 .50
compute expected value of X: 2 .25
E(X) = (0 x .25) + (1 x .50) + (2 x .25)
= 1.0

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-6
 Discrete Random Variable
Summary Measures
(continued)
 Variance of a discrete random variable

 Standard Deviation of a discrete random variable

where:
E(X) = Expected value of the discrete random variable X
Xi = the ith outcome of X
P(Xi) = Probability of the ith occurrence of X

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-7
 Computing the Mean for
Investment Returns
Return per $1,000 for two types of investments

Investment
P(XiYi) Economic condition Passive Fund X Aggressive Fund Y
.2 Recession - $ 25 - $200
.5 Stable Economy + 50 + 60
.3 Expanding Economy + 100 + 350

E(X) = μX = (-25)(.2) +(50)(.5) + (100)(.3) = 50

E(Y) = μY = (-200)(.2) +(60)(.5) + (350)(.3) = 95

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-8
 Computing the Standard Deviation
for Investment Returns
Investment
P(XiYi) Economic condition Passive Fund X Aggressive Fund Y
.2 Recession - $ 25 - $200
.5 Stable Economy + 50 + 60
.3 Expanding Economy + 100 + 350

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-9
 Interpreting the Results for
Investment Returns
 The aggressive fund has a higher expected
return, but much more risk

μY = 95 > μX = 50
but
σY = 193.21 > σX = 43.30

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-10
 Probability Distributions
Probability
Distributions

Ch. 5 Discrete Continuous Ch. 6

Probability Probability
Distributions Distributions

Binomial Normal

Hypergeometric Uniform

Poisson Exponential

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-11
 The Binomial Distribution
Probability
Distributions

Discrete
Probability
Distributions

Binomial

Hypergeometric

Poisson

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-12
 Binomial Probability Distribution
 A fixed number of observations, n
 e.g.: 15 tosses of a coin; ten light bulbs taken from a shipment
 Two mutually exclusive and collectively exhaustive
categories
 e.g.: head or tail in each toss of a coin; defective or not defective
light bulb
 Generally called “success” and “failure”
 Probability of success is p, probability of failure is 1 – p
 Constant probability for each observation
 e.g.: Probability of getting a tail is the same each time we toss
the coin

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-13
 Binomial Probability Distribution
(continued)

 Observations are independent

 The outcome of one observation does not affect the outcome
of the other
 Two sampling methods
 Infinite population without replacement
 Finite population with replacement

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-14
 Examples
 A manufacturing plant labels items as
either defective or acceptable
 A firm bidding for contracts will either get a
contract or not
 A marketing research firm receives survey
responses of “yes I will buy” or “no I will not
buy”
 New job applicants either accept the offer
or reject it

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-15
 Rule of Combinations

 The number of combinations of selecting X

objects out of n objects is

where:
n! =n(n - 1)(n - 2) . . . (2)(1)
X! = X(X - 1)(X - 2) . . . (2)(1)
0! = 1 (by definition)

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-16
 Binomial Distribution Formula

n! X n-X
P(X) = p (1-p)
X ! (n - X)!
P(X) = probability of X successes in n trials,
with probability of success p on each trial
Example: Flip a coin four
times, let x = # heads:
X = number of ‘successes’ in sample,
n=4
(X = 0, 1, 2, ..., n)
p = 0.5
n = sample size (number of trials
or observations) 1 - p = (1 - .5) = .5
p = probability of “success” X = 0, 1, 2, 3, 4

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-17
 Example:
Calculating a Binomial Probability
What is the probability of one success in four flips
if the probability of success is .5?
X = 1, n = 4, and p = .5

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-18
 Binomial Distribution
 The shape of the binomial distribution depends on the
values of p and n
Mean P(X) n = 5 p = 0.1
.6
 Here, n = 5 and p = .1 .4
.2
0 X
0 1 2 3 4 5

.6
P(X) n = 5 p = 0.5
 Here, n = 5 and p = .5
(all distributions for p=.5 .4
.2
are symmetrical)
0 X
0 1 2 3 4 5
Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-19
 Binomial Distribution
Characteristics

 Mean

 Variance and Standard Deviation

Where n = sample size

p = probability of success
(1 – p) = probability of failure

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-20
 Binomial Characteristics
Examples

Mean .6
P(X) n = 5 p = 0.1
.4
.2
0 X
0 1 2 3 4 5

.6
P(X) n = 5 p = 0.5
.4
.2
0 X
0 1 2 3 4 5

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-21
 Using PHStat

 Select PHStat / Probability & Prob. Distributions / Binomial…

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-22
 Using PHStat
(continued)
 Enter desired values in dialog box

Here: n = 10
p = .35

Output for X = 0
to X = 10 will be
generated by PHStat

Optional check boxes

for additional output

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-23
 PHStat Output

P(X = 3 | n = 10, p = .35) = .2522

P(X > 5 | n = 10, p = .35) = .0949

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-24
 The Hypergeometric Distribution
Probability
Distributions

Discrete
Probability
Distributions

Binomial

Hypergeometric

Poisson

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-25
 The Hypergeometric Distribution

 “n” trials in a sample taken from a finite

population of size N
 Sample taken without replacement
 Trials are dependent
 Concerned with finding the probability of “X”
successes in the sample where there are “A”
successes in the population

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-26
 Hypergeometric Distribution
Formula
(Two possible outcomes per trial)

Where
N = Population size
A = number of successes in the population
N – A = number of failures in the population
n = sample size
X = number of successes in the sample
n – X = number of failures in the sample
Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-27
 Properties of the
Hypergeometric Distribution
 The mean of the hypergeometric distribution is

 The standard deviation is

Where is called the “Finite Population Correction Factor”

from sampling without replacement from a
finite population

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-28
 Using the
Hypergeometric Distribution
■ Example: 3 different computers are checked from 10 in
the department. 4 of the 10 computers have illegal
software loaded. What is the probability that 2 of the 3
selected computers have illegal software loaded?
N = 10 n=3
A=4 X=2

The probability that 2 of the 3 selected computers will have

illegal software loaded is .30
Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-29
 Hypergeometric Distribution
in PHStat
 Select:
PHStat / Probability & Prob. Distributions / Hypergeometric …

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-30
 Hypergeometric Distribution
in PHStat
(continued)

 Complete dialog box entries and get output …

N = 10 n=3
A=4 X=2

P(X = 2) = 0.3
Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-31
 The Poisson Distribution
Probability
Distributions

Discrete
Probability
Distributions

Binomial

Hypergeometric

Poisson

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-32
 The Poisson Distribution

 Apply the Poisson Distribution when:

 You wish to count the number of times an event
occurs in a given interval
 The probability that an event occurs in the interval is
the same for all intervals of equal size
 The number of events that occur in one interval is
independent of the number of events that occur in the
other intervals
 The average number of events per interval or unit is 
(lambda)

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-33
 Poisson Distribution Formula

where:
X = number of successes per unit
 = expected number of successes per interval
e = base of the natural logarithm system (2.71828...)

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-34
 Poisson Distribution
Characteristics

 Mean

 Variance and Standard Deviation

where  = expected number of successes per unit

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-35
 Graph of Poisson Probabilities

Graphically:
 = .50
=
X 0.50
0 0.6065
1 0.3033
2 0.0758
3 0.0126
4 0.0016
5 0.0002
6 0.0000
7 0.0000 P(X = 2) = .0758

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-36
 Poisson Distribution Shape

 The shape of the Poisson Distribution

depends on the parameter  :
 = 0.50  = 3.00

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-37
 Poisson Distribution
in PHStat
 Select:
PHStat / Probability & Prob. Distributions / Poisson…

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-38
 Poisson Distribution
in PHStat
(continued)

 Complete dialog box entries and get output …

P(X = 2) = 0.0758

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-39
 Chapter Summary

 Addressed the probability of a discrete random

variable
 Discussed the Binomial distribution
 Discussed the Poisson distribution
 Discussed the Hypergeometric distribution

Statistics for Managers Using Microsoft Excel, 4e © 2004 Prentice-Hall, Inc. Chap 5-40