2009 Spring TUNG, Yik-Man

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ISOM111 Business Statistics
Tutorial Set 4


Random Variable, RV

A Random Variable, RV, is a function, 9 O : X , which assigns every individual of Oto a
real number. It is usually for simplicity denoted by X .

Discrete or Continuous.

Probability Function and Probability Distribution

The Probability Distribution describes the values and probabilities that a RV can take.

The Probability of an event O _ E is usually denoted by )) ( ( E X P or simply ) (X P .

A Probability Function, ] 1 , 0 [ : X f , which assigns every subset of X to a real number
denoted simply by ) (X f .

For a discrete RV, the probability function is usually called Probability Mass Function, or
simply PMF.

For a continuous RV, the probability function is usually called Probability Density Function,
or simply PDF.

Expected Value and Variance

Mathematical Expectation (Mean ):
(Discrete)

=
= =
N
i
i i X
X f X X E
1
) ( ) ( , where ) (X f is the PMF of X , where N is the
population size.
(Continuous) dX X Xf X E
X
}

= = ) ( ) ( , where ) (X f is the PDF of X .
Measure of average value of X in the long run.

Variance :
(Discrete)
2 2 2
1
2
1
2 2
)] ( [ ) ( ) ( ) ( ) ( ) var( X E X E X f X X f X X
X
N
i
i i
N
i
i X i X
= = = =

= =
o .
(Continuous)
2 2 2 2 2 2
)] ( [ ) ( ) ( ) ( ) ( X E X E dX X f X dX X f X
X X X
= = =
} }

o .
The square root is called Standard Derivation and usually uses to measure financial risk.

Useful formulas for calculating Expectation:
If b aX Y + = , then b a b X aE Y E
X Y
+ = + = = ) ( ) ( and
2 2 2
) var(
x Y
a Y o o = = .
If
2 2 1 1
X a X a Y + = , then ) ( ) ( ) (
2 2 1 1
X E a X E a Y E + = and
) , cov( 2 ) var( ) var( ) var(
2 1 2 1 2
2
2 1
2
1
X X a a X a X a Y + + = .
2009 Spring TUNG, Yik-Man
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Example

1. Suppose a survey was taken of 1000 people. Of the 1000 persons surveyed 430 owned their
own homes, 625 owned stocks and 325 owned stocks and their own homes. In addition
53% of the people surveyed were woman and 20% of these woman owned their own home.
a). What is the probability that a person owns their home?
b). Given that a person own stocks what is the probability that the person does not own a
home?
c). What is the probability that a home owner is a woman?

Sol: a). 43 . 0
1000
430
) ( = = Home P .

b).By a, we have 43 . 0 ) ( = Home P . Also, from the given information, we have:
625 . 0
1000
625
) ( = = Stocks P and 325 . 0
1000
325
) ( = = Stocks Home P .
So the required probability is:

48 . 0
625 . 0
325 . 0
1
) ( ) ( 1
) ( ) (
) | (
= =
=
=
Stocks P Stocks Home P
Stocks P Stocks Home P
Stocks Home P
C
C


c). From given information, we have:
53 . 0 ) ( = Woman P and 106 . 0 2 . 0 53 . 0 ) ( = = Home Woman P
The required probability is:

2465 . 0
43 . 0
106 . 0
) ( ) (
) | (
~ =
= Home P Woman Home P
Home Woman P


2. In a survey of credit card market in Hong Kong, data from 100 customers are collected.
Two variables are extracted for analysis, namely GENDER (1=Male, 2=Female) and
PURPOSE (main purpose of using the card: 1=Purchasing, 2=Cash Advance, 3=Both). The
data are summarized in the table below:

Count of
CUSTOMER
PURPOSE
GENDER Purchasing
Cash
Advance
Purchasing
and Cash
Advance
Grand
Total
Male 34 2 10 46
Felmale 41 1 12 54
Grand Total 75 3 22 100

2009 Spring TUNG, Yik-Man
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a). If a customer is selected at random from the data set, what is the probability that:
i). the customer is female?
ii). the customers main purpose of using the card is cash advance?
iii). the customer is a female and her main purpose of using the card is purchasing?
b). John is a customer of a local bank. Estimate the chance that he mainly uses his credit
card for cash advance?
c). Is the main purpose of using the credit card independent of the gender?

Sol: ai). 54 . 0 ) ( = Female P

aii). 03 . 0 ) ( = Cash P

aiii). 41 . 0 ) sin ( = g Purcha Female P

b). The required probability is:
04 . 0
46 . 0
02 . 0
) (
) (
) | ( ~ =

=
Male P
Male Cash P
Male Cash P

c). Main purpose of credit card is NOT independent to gender. Because,
) ( 03 . 0 04 . 0 ) | ( Cash P Male Cash P = = ~

3. There are two stocks, Sugarcane(S) and Best Candy(B), with the probability rate of return
as follows:



If a portfolio is half of Sugarcane and half of Best Candy, fill in the following portfolio
return distribution and calculate the expected return and risk of the portfolio.








Sol: Expected Portfolio Return ) (
p
R E is (0.175) (0.5) + (0.025) (0.3) + (-0.025) (0.2) = 0.09
Portfolio Risk: 2 . 0 ) 09 . 0 025 . 0 ( 3 . 0 ) 09 . 0 025 . 0 ( 5 . 0 ) 09 . 0 175 . 0 (
2 2 2
+ + =
p
o
086746757 . 0 ~






Bullish
Market
Bearish
Market
Sugar Crisis
Probability 0.5 0.3 0.2
Rate of Return
Sugarcane 10% -5% 20%
Best Candy 25% 10% -25%

Bullish
Market
Bearish
Market
Sugar Crisis
Probability 0.5 0.3 0.2
Rate of Return Portfolio
0.5(0.1+0.25)
= 0.175
or 17.5%
0.5(-0.05+0.1)
= 0.025
or 2.5%
0.5(0.2-0.25)
= -0.025
or -2.5%
2009 Spring TUNG, Yik-Man
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4. (Spring08Exam1Q1) For a murder trial in the High Court of Hong Kong, a jury of 9 people
is to be randomly selected from a group of 30 preselected potential jurors, of whom 20 are
ethnic Chinese, 6 are Westerners, and 4 are ethnic minorities from South Asia. If the
selected jury contains too few non-ethnic Chinese, crities may have reasons to doubt the
randomness of the selection.
a). What is the probability that the selected jury contains exactly 3 non-ethnic Chinese?
b). What is the probability that the selected jury contains at least 3 but no more that 5 non-
ethnic Chinese?

Sol: Let X be the no. of ethnic Chinese in the selected jury, then:
a). 325096193 . 0
14307150
120 38760
) 6 (
30
9
10
3
20
6
~

= =
C
C C
X P .

b). ) 6 ( ) 5 ( ) 4 ( ) 6 4 ( = + = + = = s s X P X P X P X P

14307150
120 38760 210 15504 252 4845
30
9
10
3
20
6
30
9
10
4
20
5
30
9
10
5
20
4
+ +
=

=
C
C C
C
C C
C
C C

638001279 . 0 ~

5. (PS3Q1.) In one western state, it is required that every prospective newly licensed driver
take (but not necessarily pass) a course in driver training prior to taking the drivers license
test. It is known that eighty percent of those who take the driver training course pass it.
Further, the probability of passing the drivers license test given that the driver training
course is passed is 0.98 while the probability of failing the drivers license test given that
the driver training course is failed is just 0.70. A randomly selected individual from this
state has just passed the drivers license test. What is the probability that this person passed
the required driver training course?

Sol: We illustrate the situation by the following tree diagram:











) ( ) (
) (
) (
) (
) | (
FCourse PTest P PCourse PTest P
PCourse PTest P
PTest P
PTest PCourse P
PTest PCourse P
+

=

=


9289 . 0
3 . 0 2 . 0 98 . 0 8 . 0
98 . 0 8 . 0
) | ( ) ( ) | ( ) (
) | ( ) (
~
+

=
+

=
FCourse PTest P FCourse P PCourse PTest P PCourse P
PCourse PTest P PCourse P

Take course

0.8 0.2
Passed Course Failed Course
Failed Test Passed Test
0.98
Passed Test Failed Test
0.02 0.30 0.70