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So:
When we know the probability p of every value x we can calculate the Expected Value
(Mean) of X:
= xp
Note: is Sigma Notation, and means to sum up.
To calculate the Expected Value:
sum them up
It is a weighted mean: values with higher probability have higher contribution to the mean.
Variance
The Variance is:
Var(X) = x2p 2
To calculate the Variance:
Standard Deviation
The Standard Deviation is the square root of the Variance:
= Var(X)
You plan to open a new McDougals Fried Chicken, and found these stats for
similar restaurants:
Percent
Year's Earnings
20%
$50,000 Loss
30%
$0
40%
$50,000 Profit
10%
$150,000 Profit
Using that as probabilities for your new restaurant's profit, what is the Expected Value and
Standard Deviation?
p = 1
xp
x2p
-10
0
20
15
500
0
1000
2250
xp = 25
x2p = 3750
-50
0
50
150
= xp = 25
Var(X) = x2p 2 = 3750 252 = 3750 625 = 3125
= 3125 = 56 (to nearest whole number)
= $25,000
= $56,000
So you might expect to make $25,000, but with a very wide deviation possible.
Let's try that again, but with a much higher probability for $50,000:
Example (continued):
Now with different probabilities (the $50,000 value has a high probability of 0.7 now):
-50
0
50
150
Sums:
p = 1
xp
x2p
-5
0
35
15
250
0
1750
2250
xp = 45
x2p = 4250
= xp = 45
Var(X) = x2p 2 = 4250 452 = 4250 2025 = 2225
= 2225 = 47 (to nearest whole number)
In thousands of dollars:
= $45,000
= $47,000
Continuous
Random Variables can be either Discrete or Continuous:
Continuous Data can take any value within a range (such as a person's height)
Here we looked only at discrete data, as finding the Mean, Variance and Standard Deviation
of continuous data needs Integration.
Summary
A Random Variable is a variable whose possible values are numerical outcomes
of a random experiment.
The Mean (Expected Value) is: = xp
2