ChapterSeven

RandomVariablesandDiscrete
ProbabilityDistributions

352

RandomVariableandProbabilityDistribution
Inthebackground,thereisarandomexperiment.As
wediscussed,accompanyingthisexperiment,we
have:
ASampleSpace(allpossibleoutcomesofthe
experiment)
Aprobability(assignedtoeachoutcomeinthe
experiment)
Wenowaddtheconceptofarandomvariable anda
probabilitydistribution.
353

 RandomVariable: Arandomvariableisafunction
thatassignsanumbertoeachoutcomeofthe
experiment.
Therearetwomaintypesofrandomvariables:
DiscreteRandomVariables
ContinuousRandomVariables
Thedistinctionbasicallydependsontherangeof
valuesthattherandomvariablecantake.
Adiscreterandomvariable:isonethatcantakeon
acountablenumberofvalues.
Acontinuousrandomvariableisonethatcantake
onanuncountablenumberofvalues.
354

 Example:Experimentisflippingacoin10times,and
letX=#ofheadsobservedintheexperiment. Thisisa
discreterandomvariable,sinceXcanonlytakeon
thevalues{0,1,2,,10},whichisfiniteandtherefore
countable.
Example:Supposetheexperimentismeasuringthe
timetocompleteatask,andletX=totaltimetaken.
Thisisacontinuousrandomvariable:Sincetimeis
continuous,therangeofvaluesthatXcantakeisa
continuum,andthereforeuncountable.

355

 Tohelpunderstandthedistinctionbetween
countableanduncountablesets,keepinmind:
a) Thesetofallintegernumbersiscountable.
b) Thesetofallrealnumbersisuncountable(a
continuum).

356

ProbabilityDistribution
Aprobabilitydistributiondescribesthevalues
thatarandomvariablecantake,alongwith
theprobabilityassociatedwitheachvalue.
Aprobabilitydistributioncanbesummarized
byatable,aformulaoragraph.
InChapter6wefocusontheprobability
distributionofadiscreterandomvariable.
357

 IfXisadiscreterandomvariable,itsprobability
distributionsimplyrepresentstheprobabilitythatX
cantakeoneachoneofitspossiblevalues.
Weuseuppercase todenotearandomvariable,
andweuselowercase todenoteaparticularvalue
thatthisrandomvariablecantake.
Werepresenttheprobabilitythattherandom
variableXwillequalxasP(X=x) or,moresimply,
P(x).
358

RequirementsofaDiscreteProbabilityDistribution
Asaresultoftheconditionsrequiredofaprobability
(nonnegative,theymustaddto1),theprobability
distributionPofadiscreterandomvariablemust
satisfy:

Wherethenotation

DenotesthesumofP(x)overallpossiblevaluesx
thattherandomvariableXcantake.

359

 Example7.1:TheStatisticalAbstractofthe
UnitedStatesispublishedannually.Itcontainsa
widevarietyofinformationbasedonthecensus
aswellasothersources.
Itsgoalistoprovideinformationaboutavariety
ofdifferentaspectsofthelivesofthecountrys
residents.
Oneofthequestionsaskshouseholdstoreport
thenumberofpersonslivinginthehousehold.
Thefollowingtablesummarizesthedata.
Developtheprobabilitydistributionofthe
randomvariabledefinedasthenumberof
personsperhousehold.
360

NumberofPersons
1
2
3
4
5
6
7ormore

NumberofHouseholds(millions)
31.1
38.6
18.8
16.2
7.2
2.7
1.4

Total116.0

361

 Probabilitydistributionscanbeestimatedfrom
relativefrequencies.
x
P(x)
1
31.1/116.0=.268
2
38.6/116.0=.333
3
18.8/116.0=.162
4
16.2/116.0=.140
5
7.2/116.0=.062
6
2.7/116.0=.023
7ormore
1.4/116.0=.012
Total
1.000

362

 Whatistheprobabilitythereare4ormore
persons inanygivenhousehold?
x
1
2
3
4
5
6
7ormore

P(x)
.268
.333
.162
.140
.062
.023
.012

P(X 4) = P(4) + P(5) + P(6) + P(7 or more)

= .140 + .062 + .023 + .012 = .237
363

 Example7.2: Amutualfundsalespersonhas
arrangedtocallonthreepeopletomorrow.
Basedonpastexperiencethesalespersonknows
thatthereisa20%chanceofclosingasaleoneach
call.
Determinetheprobabilitydistributionofthenumber
ofsalesthesalespersonwillmake.
Therandomvariableofinterestisthenumberof
salesmade. Noticethattheexperimentconsistsof
callingthreedifferentclients,andthattheoutcomes
ofeachcallareindependentofeachother.
Foreachcall,letSdenotetheeventsuccess(i.e.
closingasale).PastexperiencesaysthatP(S)=.20.
Therefore,SC isnotclosingasale,andP(SC)=.80
364

 Wecandevelopingtheprobabilitydistribution
usingaProbabilityTree.
Sales Call 1

Sales Call 2

Sales Call 3

(.2)(.2)(.8)= .032

P(S)=.2
P(S)=.2

P(SC)=.8

P(S)=.2

SSS

P(SC)=.8
P(S)=.2

S S SC
S SC S

P(SC)=.8
P(S)=.2

S SC SC
SC S S

P(SC)=.8
P(S)=.2

SC S SC
SC SC S

P(SC)=.8

SC SC SC

P(SC)=.8

P(S)=.2
P(SC)=.8

X
3
2
1
0

P(x)
.23 = .008
3(.032)=.096
3(.128)=.384
.83 = .512

P(X=2) is illustrated here

365

Population/ProbabilityDistribution
Thediscreteprobabilitydistributiondescribes
apopulation.
Sincewehavepopulations,wecandescribe
thembycomputingvariousparameters.
Twoofthepopulationparameterswestudied
previouslyare:populationmean and
populationvariance.
366

PopulationMean(ExpectedValue)ofaDiscrete
RandomVariable
Ourgeneraldefinitionofthepopulationmeanis

IfweknowthattherandomvariableXisdiscrete,we
canreexpressintermsoftheprobability
distributionofX.Wehave:

ThisparameterisalsocalledtheexpectedvalueofX
andisrepresentedbyE(X).
367

PopulationVarianceofaDiscreteRandomVariable
Thepopulationvarianceofadiscreterandomvariable
canbeexpressedsimilarly.Itistheweightedaverageof
thesquareddeviations fromthemean:

Asbefore,thereisashortcutformulation

Thestandarddeviationisthesameasbefore:
368

 Example7.1(continued): Findthemean,variance,and
standarddeviationforthepopulationofX=numberof
personsperhousehold.Assumethatthecategory7or
moreisactually7.
ThemeanE(X)isgivenby:
E ( X ) 1 P(1) 2 P(2) ... 7 P(7)

=1(.268)+2(.333)+3(.162)
+4(.140)+5(.062)+6(.023)
+7(.012)
=2.513
369

 ThevarianceofXisgivenby:

= (1 2.513)2(.268) + (2 2.513)2(.333)++(7 2.513)2(.012)

= 1.958

ThestandarddeviationofXis
= 1.958 1.399

370

LawsofExpectedValue
TherearecertainpropertiesoftheExpectedValue
thatareusefultoknow.Letcbeaconstant.Then:
(1)E(c)=c
Inwords:Theexpectedvalueofaconstant(c)isjust
thevalueoftheconstant.

(2)E(X+c)=E(X)+c, and(3)E(cX)=cE(X)
Inwords:Wecanpullaconstantoutofthe
expectedvalueexpression(eitheraspartofasum
witharandomvariableXorasacoefficientofrandom
variableX).
371

 Example7.4: Monthlysaleshaveameanof
$25,000andastandarddeviationof$4,000.
Profitsarecalculatedbymultiplyingsalesby30%and
subtractingfixedcostsof$6,000.

Findthemean monthlyprofit.
1)Describetheproblemstatementinalgebraicterms:
saleshaveameanof$25,000 E(Sales)=25,000
profitsarecalculatedby
Profit=.30(Sales) 6,000

372

Findthemean monthlyprofit.
E(Profit) =E[.30(Sales) 6,000]
=E[.30(Sales)] 6,000 [byrule#2]
=.30E(Sales) 6,000 [byrule#3]
=.30(25,000) 6,000=1,500
Thus,themeanmonthlyprofitis$1,500

373

LawsofVariance
Asbefore,letcbeaconstant.Then:
1. V(c)=0
Inwords:Thevarianceofaconstantiszero(makes
totalsense).
2. V(X+c)=V(X)
Inwords:Thevarianceofarandomvariableanda
constantisjustthevarianceoftherandomvariable
(per1above).
3. V(cX)=c2V(X)
Inwords:Thevarianceofarandomvariableanda
constantcoefficientisthecoefficientsquared times
thevarianceoftherandomvariable.
374

Example7.4(continued):Monthlysaleshaveameanof
$25,000andastandarddeviationof$4,000.Profitsare
calculatedbymultiplyingsalesby30%andsubtracting
fixedcostsof$6,000.
Findthestandarddeviation ofmonthlyprofits.
1)Describetheproblemstatementinalgebraicterms:
saleshaveastandarddeviationof$4,000
V(Sales)=4,0002 =16,000,000
(remembertherelationshipbetweenstandarddeviation
andvariance)
profitsarecalculatedby Profit=.30(Sales) 6,000

375

2)Thevariance ofprofitis=V(Profit)
=V[.30(Sales) 6,000]
=V[.30(Sales)]
[byrule#2]
[byrule#3]
=(.30)2V(Sales)
=(.30)2(16,000,000)=1,440,000
Again,standarddeviation isthesquareroot of
variance,sostandarddeviationofProfit=
(1,440,000)1/2 =$1,200

376

 Example7.4(summary):Monthlysaleshavea
meanof$25,000andastandarddeviationof
$4,000.Profitsarecalculatedbymultiplying
salesby30%andsubtractingfixedcostsof
$6,000.
Findthemean andstandarddeviation of
monthlyprofits.
Themean monthlyprofitis$1,500
Thestandarddeviation ofmonthlyprofitis
$1,200
377

BivariateDistributions
Uptonow,wehavelookedatunivariate distributions,
thatis,probabilitydistributionsinone variable.
Asyoumightguess,bivariatedistributions are
probabilitiesofcombinationsoftwo variables.
Bivariateprobabilitydistributionsarealsocalledjoint
probability.
AjointprobabilitydistributionofXandYisatableor
formulathatliststhejointprobabilitiesforall pairs of
valuesxandy,andisdenotedP(x,y).
P(x,y)=P(X=xandY=y)
378

 Asyoumightexpect,therequirementsfora
bivariatedistribution aresimilartoa
univariate distribution,withonlyminor
changestothenotation:
forallpairs(x,y)

379

 Example7.5: XavierandYvettearerealestate
agents.LetXdenotethenumberofhousesthat
XavierwillsellinamonthandletYdenotethe
numberofhousesYvettewillsellinamonth.
Ananalysisoftheirpastmonthlyperformanceshas
thefollowingjointprobabilities(bivariateprobability
distribution).

380

MarginalProbabilities
Asbefore,wecancalculatethemarginalprobabilities by
summingacrossrowsanddowncolumnstodetermine
theprobabilitiesofXandYindividually:

For example: the probability that Xavier sells 1 house = P(X=1) =0.50
381

DescribingtheBivariateDistribution
Wecandescribethemean,variance,andstandard
deviationofeachvariable inabivariatedistribution
byworkingwiththemarginalprobabilities

same formulae as for

univariate distributions

382

PopulationCovariance
Wecanexpressthepopulationcovariance of
twodiscretevariablesintermsoftheirjoint
probabilitydistribution as:

oralternativelyusingthisshortcutmethod:

383

CoefficientofCorrelation
The(population)coefficientofcorrelationis
calculatedinthesamewayasdescribed
earlier

384

 Example7.6: Computethecovariance andthe

coefficientofcorrelation betweenthenumbersof
housessoldbyXavierandYvette.

COV(X,Y) = (0 .7)(0 .5)(.12) + (1 .7)(0 .5)(.42) +

+ (2 .7)(2 .5)(.01) = .15
= 0.15 [(.64)(.67)] = .35
There is a weak, negative relationship between the two variables.
385

Example7.6
X
0
0
0
1
1
1
2
2
2
0.7

Y
0
1
2
0
1
2
0
1
2
0.5

Probability
0.12
0.21
0.07
0.42
0.06
0.02
0.06
0.03
0.01

X - (x)
-0.7
-0.7
-0.7
0.3
0.3
0.3
1.3
1.3
1.3

Y - (y)
-0.5
0.5
1.5
-0.5
0.5
1.5
-0.5
0.5
1.5

[X - (x)][Y-(y)]
0.042
-0.074
-0.074
-0.063
0.009
0.009
-0.039
0.020
0.020
-0.150

386

SumofTwoVariables
Thebivariatedistributionallowsustodevelop
theprobabilitydistributionofany combinationof
thetwovariables. Ofparticularinterestisthe
sum oftwovariables.
IfweconsiderourexampleofXavierandYvette
sellinghouses,wecancreatetheprobability
distributionofX+Y:

Fromhere,wecananswerquestionslikewhatis
theprobabilitythattwohousesaresold?
P(X+Y=2)=P(0,2)+P(1,1)+P(2,0)
=.07+.06+.06=.19
387

 Whatistheprobabilitythatatleastonehouseis
soldbetweenXavierandYvette?
Thisis:
Pr(X+Y1)=P(X+Y=1)+Pr(X+Y=2)+Pr(X+Y=3)+Pr(X+Y=4)
=0.63+0.19+0.05+0.01=0.88
Whatistheprobabilitythatthenumberofhouses
soldis2or3?
Thisis:
Pr(2X+Y3)=0.19+0.05=0.24

388

SumofTwoVariables
Likewise,wecancomputetheexpectedvalue,
variance,andstandarddeviationofX+Yintheusual
way
E(X+Y)=0(.12)+1(.63)+2(.19)+3(.05)+4(.01)=1.2
V(X+Y)=(0 1.2)2(.12)++(4 1.2)2(.01)=.56

x y Var (X Y) .56 .75

7.389

LawsofExpectedValueandVariancefortheSumof
TwoRandomVariables
Previously,westatedLawsforexpectedvaluesand
variancesinvolvingarandomvariableXanda
constantc.
Wealsohavelawsinvolvingthesumoftworandom
variables:
1.

E(X+Y)=E(X)+E(Y)

2.

V(X+Y)=V(X)+V(Y)+2COV(X,Y)

IfXandYareindependent,COV(X,Y)=0andthus(2)
becomes:
V(X+Y)=V(X)+V(Y)
390

Example7.5(continued):Wehadalreadyderivedthe
marginaldistributionsofXandYbefore.Wehave:

WehadobtainedE(X+Y)andV(X+Y)byderivingthe
distributionofX+Y.ButwecanusetheLawsofsumsof
randomvariables:
E(X+Y)=E(X)+E(Y)=.7+.5=1.2
V(X+Y)=V(X)+V(Y)+2COV(X,Y)
=.41+.45+2(.15)=.56
391

LawsofExpectationandVarianceforLinear
CombinationsofTwoRandomVariables
Letcanddbetwoconstants.Wecangeneralizethe
lawsofexpectationandvariancefromthesumX+Yto
anylinearcombination
cX+dY
Wehave:
1. E(cX+dY)=cE(X)+dE(Y)
2.

V(cX+dY)=c2V(X)+d2V(Y)+2cdCOV(X,Y)

IfXandYareindependent,COV(X,Y)=0andthus(2)
becomes:
V(cX+dY)=c2V(X)+d2V(Y)
392

Example:PortfolioDiversificationandAssetAllocation.
Consideraninvestorwhoformsaportfolio,consistingofonly
twostocks,byinvesting$4,000inonestockand$6,000ina
secondstock.Supposethattheresultsafter1yearare:
OneYearResults
Stock
1
2
Total

Initial
Investment
$4,000
$6,000
$10,000

ValueofInvestment
AfterOneYear
$5,000
$5,400
$10,400

OR

Percentageinvestedin
firststock

RateofReturn
onInvestment
R1 =.25(25%)
R2 =.10(10%)
Rp =.04(4%)

Percentageinvestedin
secondstock

Rp =w1R1 +w2R2 =(.4)(.25)+(.6)(.10)=.04

393

MeanandVarianceofaPortfolioofTwoStocks
TheportfolioRp isdefinedas:
Rp =w1 R1 +w2 R2
wherew1 andw2 aretheproportionsorweights
ofinvestments1and2.
Usingthelawsforlinearcombinationsof
randomvariables,wehave:
E(Rp)=w1 E(R1)+w2 E(R2)
V(Rp)=w12 V(R1)+w22 V(R2)+2w1w2 COV(R1,R2)
E(R1)andE(R2)aretheexpectedvaluesofR1andR2,
while1 and2 aretheirstandarddeviations,and is
thecoefficientofcorrelation.
394

 Example7.8:Aninvestorhasdecidedtoforma
portfoliobyputting25%ofhismoneyinto
McDonaldsstockand75%intoCiscoSystems
stock.
Theinvestorassumesthattheexpectedreturns
willbe8%and15%,respectively,andthatthe
standarddeviationswillbe12%and22%,
respectively.
a) Findtheexpectedreturnontheportfolio.
b) Computethestandarddeviationofthereturns
ontheportfolioassumingthat:
i. thetwostocksreturnsareperfectlypositively
correlated
ii. thecoefficientofcorrelationis.5
iii. thetwostocksreturnsareuncorrelated
395

a) Theexpectedvaluesofthetwostocksare
E(R1)=.08 andE(R2)=.15
Theweightsarew1 =.25andw2 =.75.
Thus,
E(R2)=w1E(R1)+w2E(R2)
=.25(.08)+.75(.15)
=.1325
(anexpectedportfolioreturnof13.25%)
396

Thestandarddeviationsare1 =.12and2 =.22.Thus,

V(Rp)=w1212 +w2222 +2w1w212
=(.252)(.122)+(.752)(.222)+2(.25)(.75) (.12)(.22)
=.0281+.0099
When =1
V(Rp)=.0281+.0099(1)=.0380
When =.5
V(Rp)=.0281+.0099(.5)=.0331
When =0
V(Rp)=.0281+.0099(0)=.0281
397

 Next,notethatthestatementoftheproblem
didnotgiveusthecovariancebetweenR1
andR2directly
However,itgaveusthestandarddeviationsof
R1andR2,anditaskedustosolvethe
problemunderthreedifferentscenarios
regardingthecorrelationbetweenR1andR2.
Recallingtheformulaforcorrelation,ifwe
havethecorrelationandthestandard
deviations,wecanrecoverthecovariance
398

 Recallthat:

and,therefore:

399

 Therefore,inthethreecorrelationscenariostobe
considered,wehave:
(i)
10.12 0.22=0.0264
(ii)
0.50.120.22=0.0132
(iii)
0
400

 Recallthat
V(Rp)=w12 V(R1)+w22 V(R2)+2w1w2 COV(R1,R2)
Therefore:
(i)If =1:
V(Rp)=0.252 0.122+0.752 0.222+2 0.25 0.75 0.0264=0.0380
(ii)If =0.5:
V(Rp)=0.252 0.122+0.752 0.222+2 0.25 0.75 0.0132=0.0331
(iii)If =0:
V(Rp)=0.252 0.122+0.752 0.222+0=0.0281

401

PortfolioDiversificationinPractice
Theformulasintroducedinthissection
requirethatweknowtheexpectedvalues,
variances,andcovariance(orcoefficientof
correlation)oftheinvestmentswere
interestedin.
Thequestionarises,Howdowedetermine
theseparameters?Themostcommon
procedureistoestimatetheparametersfrom
historicaldata,usingsamplestatistics.
402

PortfolioswithMoreThanTwoStocks
Wecanextendtheformulasthatdescribethemean
andvarianceofthereturnsofaportfoliooftwo
stockstoaportfolioofanynumberofstocks.
MeanandVarianceofaPortfolioofkStocks
k

w E(R )

E(Rp )=

i 1

V(Rp )=

i 1

w i2 i2 2

w w COV(R , R )
i

i 1 ji 1

WhereRi isthereturnoftheith stock,wi isthe

proportionoftheportfolioinvestedinstocki,andk
isthenumberofstocksintheportfolio.
403

PortfolioswithMoreThanTwoStocks
Whenkisgreaterthan2thecalculationscanbe
tediousandtimeconsuming.
Forexample,whenk=3,weneedtoknowthe
valuesofthethreeweights,threeexpected
values,threevariances,andthreecovariances.
Whenk=4,therearefourexpectedvalues,four
variancesandsixcovariances.[Thenumberof
covariances requiredingeneralisk(k1)/2.]
404

BinomialDistribution
Thebinomialdistributionisaspecificexampleofa
discreteprobabilitydistribution.
Thebinomialdistribution istheprobabilitydistribution
thatresultsfromdoingabinomialexperiment.
Binomialexperimentshavethefollowingproperties:
1) Fixednumberoftrials,representedasn.
2) Eachtrialhastwopossibleoutcomes,asuccessand
afailure.
3) P(success)=p(andthus:P(failure)=1p),foralltrials.
4) Thetrialsareindependent,whichmeansthatthe
outcomeofonetrialdoesnotaffecttheoutcomesof
anyothertrials.
405

 SuccessandFailurearejustlabels fora
binomialexperiment,thereisnovaluejudgment
implied.
Forexampleacoinflipwillresultineitherheads
ortails.Ifwedefineheadsassuccessthen
necessarilytailsisconsideredafailure.
Otherbinomialexperimentnotions:
Anelectioncandidatewinsorloses
Anemployeeismaleorfemale

406

BinomialRandomVariable
Therandomvariableofabinomialexperimentisdefinedasthe
numberofsuccessesinthentrials,andiscalledthebinomial
randomvariable.
Example:flipafaircoin10times
1)Fixednumberoftrials n=10
2)Eachtrialhastwopossibleoutcomes {heads(success),tails(failure)}
3)P(success)=0.50;P(failure)=10.50=0.50
4)Thetrialsareindependent (i.e.theoutcomeofheadsonthefirstflip
willhavenoimpactonsubsequentcoinflips).

Henceflippingacointentimesisabinomialexperimentsince
allconditionsweremet.
407

BinomialRandomVariable
Thebinomialrandomvariablecounts thenumberof
successesinn trialsofthebinomialexperiment.It
cantakeonvaluesfrom0,1,2,,n.Thus,itsa
discrete randomvariable.
Tocalculatetheprobability associatedwitheach
valueofX,weusecombinatorics:
forx=0,1,2,,n

408

 Combinatoricsisabranchofmathematicswhichhelpsus
countdiscretestructures(outcomesinourcase).
n! denotesthefactorialoftheintegern.Itisdefinedas:
,with 0!=1
Combinatoric theorytellsusthatthetotalnumberof
differentways inwhichwecanhavexsuccessesinn
trialsis:

Byindependenceofeachtrial,theprobabilityofany
outcomethatyieldsxsuccessesinntrialsis:
Pr(xsuccesses)

Pr(nxfailures)
409

 Thus,wehavethattheprobabilityofanyoutcomethat
yieldsxsuccessesinntrialsis:

Inaddition,thereareatotalof

suchoutcomes.
Thus,addinguptheprobabilitiesofallsuchoutcomes,
weobtainthebinomialprobabilityformula:

410

 Example: Aquizconsistsof10multiplechoice
questions.Eachquestionhasfivepossible
answers,onlyoneofwhichiscorrect.
Supposeastudentplanstoguesstheanswer to
eachquestion.
Whatistheprobabilitythatthestudentgetsno
answerscorrect?
Whatistheprobabilitythatthestudentgetstwo
answerscorrect?
411

 Thiscanbeseenasabinomialexperiment,
where:
a) n=numberoftrials=10
b) successofeachtrialis``correctlyguessing
theanswer.
c) Eachanswerisindependentoftheothers.
Sinceeachanswerisguessedandthereare
fivechoicesforeachquestion,wehave
P(success)=1/5=.20
412

 Thus,wehaveabinomialexperimentwhere
n=10,andP(success)=.20
Whatistheprobabilitythatthestudentgets
noanswers correct?ThisisP(X=0):

The student has about an 11% chance of getting no answers correct

using the guessing strategy.
413

 Whatistheprobabilitythatthestudentgets
twoanswers correct?Thatis,P(X=2):

Pat has about a 30% chance of getting exactly two answers

correct using the guessing strategy.
414

CumulativeProbability
Thusfar,wehavebeenusingthebinomialprobability
distributiontofindprobabilitiesforindividualvalues
ofx.
ThecumulativedistributionofXatthevaluexis
definedasP(Xx).Thatis,theprobabilitythatXis
lessthanorequaltothevaluex.
Supposethequizisfailediflessthan50%ofthe
answersarerespondedcorrectly.Findtheprobability
thatthestudentfailsthequiz.ThisisPr(X 4).Thisis
givenby:
P(X4)=P(0)+P(1)+P(2)+P(3)+P(4)
415

P(X4)=P(0)+P(1)+P(2)+P(3)+P(4)
WealreadyknowP(0)=.1074andP(2)=.3020.Using
thebinomialformulatocalculatetheothers:
P(1)=.2684,P(3)=.2013,andP(4)=.0881
WehaveP(X4)=.1074+.2684++.0881=.9672
Thus,itsabout97%probablethatthestudentwillfail
thetestusingtheluckstrategyandguessingat
answers
416

BinomialTable
Calculatingbinomialprobabilitiesbyhandistediousand
errorprone.Thereisaneasierway.RefertoTable1 in
AppendixB.
Theprobabilitieslistedinthetablesarecumulative,
i.e.P(Xk) k istherowindex;thecolumnsofthetable
areorganizedbyP(success)=p
n = 10
k
0
1
2
3
4
5
6
7
8
9

0.01
0.9044
0.9957
0.9999
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.05
0.5987
0.9139
0.9885
0.9990
0.9999
1.0000
1.0000
1.0000
1.0000
1.0000

0.1
0.3487
0.7361
0.9298
0.9872
0.9984
0.9999
1.0000
1.0000
1.0000
1.0000

0.2
0.1074
0.3758
0.6778
0.8791
0.9672
0.9936
0.9991
0.9999
1.0000
1.0000

0.25
0.0563
0.2440
0.5256
0.7759
0.9219
0.9803
0.9965
0.9996
1.0000
1.0000

0.3
0.0282
0.1493
0.3828
0.6496
0.8497
0.9527
0.9894
0.9984
0.9999
1.0000

0.4
0.0060
0.0464
0.1673
0.3823
0.6331
0.8338
0.9452
0.9877
0.9983
0.9999

0.5
0.0010
0.0107
0.0547
0.1719
0.3770
0.6230
0.8281
0.9453
0.9893
0.9990

0.6
0.0001
0.0017
0.0123
0.0548
0.1662
0.3669
0.6177
0.8327
0.9536
0.9940

0.7
0.0000
0.0001
0.0016
0.0106
0.0473
0.1503
0.3504
0.6172
0.8507
0.9718

0.75
0.0000
0.0000
0.0004
0.0035
0.0197
0.0781
0.2241
0.4744
0.7560
0.9437

0.8
0.0000
0.0000
0.0001
0.0009
0.0064
0.0328
0.1209
0.3222
0.6242
0.8926

0.9
0.0000
0.0000
0.0000
0.0000
0.0001
0.0016
0.0128
0.0702
0.2639
0.6513

0.95
0.0000
0.0000
0.0000
0.0000
0.0000
0.0001
0.0010
0.0115
0.0861
0.4013

0.99
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0001
0.0043
0.0956

417

 Whatistheprobabilitythatthestudentgetsno
answers correct?i.e.whatisP(X=0),given
P(success)=.20 andn=10?
n = 10
k
0
1
2
3
4
5
6
7
8
9

0.01
0.9044
0.9957
0.9999
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.05
0.5987
0.9139
0.9885
0.9990
0.9999
1.0000
1.0000
1.0000
1.0000
1.0000

0.1
0.3487
0.7361
0.9298
0.9872
0.9984
0.9999
1.0000
1.0000
1.0000
1.0000

0.2
0.1074
0.3758
0.6778
0.8791
0.9672
0.9936
0.9991
0.9999
1.0000
1.0000

0.25
0.0563
0.2440
0.5256
0.7759
0.9219
0.9803
0.9965
0.9996
1.0000
1.0000

0.3
0.0282
0.1493
0.3828
0.6496
0.8497
0.9527
0.9894
0.9984
0.9999
1.0000

0.4
0.0060
0.0464
0.1673
0.3823
0.6331
0.8338
0.9452
0.9877
0.9983
0.9999

0.5
0.0010
0.0107
0.0547
0.1719
0.3770
0.6230
0.8281
0.9453
0.9893
0.9990

0.6
0.0001
0.0017
0.0123
0.0548
0.1662
0.3669
0.6177
0.8327
0.9536
0.9940

0.7
0.0000
0.0001
0.0016
0.0106
0.0473
0.1503
0.3504
0.6172
0.8507
0.9718

0.75
0.0000
0.0000
0.0004
0.0035
0.0197
0.0781
0.2241
0.4744
0.7560
0.9437

0.8
0.0000
0.0000
0.0001
0.0009
0.0064
0.0328
0.1209
0.3222
0.6242
0.8926

0.9
0.0000
0.0000
0.0000
0.0000
0.0001
0.0016
0.0128
0.0702
0.2639
0.6513

0.95
0.0000
0.0000
0.0000
0.0000
0.0000
0.0001
0.0010
0.0115
0.0861
0.4013

P(X = 0) = P(X 0) = .1074

418

0.99
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0001
0.0043
0.0956

 Whatistheprobabilitythatthestudentgetstwo
answers correct?i.e.whatisP(X=2),given
P(success)=.20 andn=10?
n = 10
k
0
1
2
3
4
5
6
7
8
9

0.01
0.9044
0.9957
0.9999
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.05
0.5987
0.9139
0.9885
0.9990
0.9999
1.0000
1.0000
1.0000
1.0000
1.0000

0.1
0.3487
0.7361
0.9298
0.9872
0.9984
0.9999
1.0000
1.0000
1.0000
1.0000

0.2
0.1074
0.3758
0.6778
0.8791
0.9672
0.9936
0.9991
0.9999
1.0000
1.0000

0.25
0.0563
0.2440
0.5256
0.7759
0.9219
0.9803
0.9965
0.9996
1.0000
1.0000

0.3
0.0282
0.1493
0.3828
0.6496
0.8497
0.9527
0.9894
0.9984
0.9999
1.0000

0.4
0.0060
0.0464
0.1673
0.3823
0.6331
0.8338
0.9452
0.9877
0.9983
0.9999

0.5
0.0010
0.0107
0.0547
0.1719
0.3770
0.6230
0.8281
0.9453
0.9893
0.9990

0.6
0.0001
0.0017
0.0123
0.0548
0.1662
0.3669
0.6177
0.8327
0.9536
0.9940

0.7
0.0000
0.0001
0.0016
0.0106
0.0473
0.1503
0.3504
0.6172
0.8507
0.9718

0.75
0.0000
0.0000
0.0004
0.0035
0.0197
0.0781
0.2241
0.4744
0.7560
0.9437

0.8
0.0000
0.0000
0.0001
0.0009
0.0064
0.0328
0.1209
0.3222
0.6242
0.8926

0.9
0.0000
0.0000
0.0000
0.0000
0.0001
0.0016
0.0128
0.0702
0.2639
0.6513

0.95
0.0000
0.0000
0.0000
0.0000
0.0000
0.0001
0.0010
0.0115
0.0861
0.4013

0.99
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0001
0.0043
0.0956

P(X = 2) = P(X2) P(X1) = .6778 .3758 = .3020

remember, the table shows cumulative probabilities
419

 Whatistheprobabilitythatthestudentfails
thequiz?i.e.whatisP(X4),given
P(success)=.20 andn=10?
n = 10
k
0
1
2
3
4
5
6
7
8
9

0.01
0.9044
0.9957
0.9999
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.05
0.5987
0.9139
0.9885
0.9990
0.9999
1.0000
1.0000
1.0000
1.0000
1.0000

0.1
0.3487
0.7361
0.9298
0.9872
0.9984
0.9999
1.0000
1.0000
1.0000
1.0000

0.2
0.1074
0.3758
0.6778
0.8791
0.9672
0.9936
0.9991
0.9999
1.0000
1.0000

0.25
0.0563
0.2440
0.5256
0.7759
0.9219
0.9803
0.9965
0.9996
1.0000
1.0000

0.3
0.0282
0.1493
0.3828
0.6496
0.8497
0.9527
0.9894
0.9984
0.9999
1.0000

0.4
0.0060
0.0464
0.1673
0.3823
0.6331
0.8338
0.9452
0.9877
0.9983
0.9999

0.5
0.0010
0.0107
0.0547
0.1719
0.3770
0.6230
0.8281
0.9453
0.9893
0.9990

0.6
0.0001
0.0017
0.0123
0.0548
0.1662
0.3669
0.6177
0.8327
0.9536
0.9940

0.7
0.0000
0.0001
0.0016
0.0106
0.0473
0.1503
0.3504
0.6172
0.8507
0.9718

0.75
0.0000
0.0000
0.0004
0.0035
0.0197
0.0781
0.2241
0.4744
0.7560
0.9437

0.8
0.0000
0.0000
0.0001
0.0009
0.0064
0.0328
0.1209
0.3222
0.6242
0.8926

0.9
0.0000
0.0000
0.0000
0.0000
0.0001
0.0016
0.0128
0.0702
0.2639
0.6513

0.95
0.0000
0.0000
0.0000
0.0000
0.0000
0.0001
0.0010
0.0115
0.0861
0.4013

P(X4)=.9672
420

0.99
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0001
0.0043
0.0956

UsingtheBinomialProbabilityTable
Thebinomialtablegivescumulativeprobabilitiesfor
P(Xk).
However,wemaybeinterestedinprobabilitiesof
thetype:
a) Pr(X=k)
b) Pr(Xk)
c) Pr(k1 Xk2)(withk1 <k2)

Wecancomputetheseprobabilitiesfrom
cumulativeprobabilities,weexplainhownext
421

 IfXisdiscrete,wecanobtainP(X=k) fromP(Xk)
andP(Xk1)by:

P(X=k)=P(Xk) P(Xk1)
Likewise,forprobabilitiesgivenasP(Xk),we
have:
P(Xk)=1 P(Xk1)
Finally,wecancomputePr(k1 Xk2) as:
Pr(k1 Xk2)=Pr(Xk2) Pr(Xk1 1)
422

 Example:Problem7.93. Theleadingbrandof
dishwasherdetergenthasa30%marketshare.Asample
of25dishwasherdetergentcustomerswastaken.What
istheprobabilitythat10offewercustomerschosethe
leadingbrand?
Thisisanexampleofabinomialrandomvariable:
X=#ofcustomerswhoboughtleadingdishwasherbrand
Theunderlyingexperimentconsistsof:
n=25trials
p=Prob(Success)=0.30
TheproblemasksforP(X10).UsingTable1inthe
Appendix,wehaveP(X10)=0.9022
423

 Example:Problem7.97. Itisbelievedthat10%ofall
votersintheUnitedStatesconsiderthemselvesas
Independent.Asurveyasked25peopletoidentify
themselvesasDemocrat,Republicanor
Independent.
a) Whatistheprobabilitythatnoneofthepeoplein
thesurveyareIndependent?
b) Whatistheprobabilitythatfewerthanfivepeople
areIndependent?
c) Whatistheprobabilitythatmorethantwopeople
areIndependent?

424

 Onceagain,thisisanexampleofabinomialrandom
variable
X=#ofIndependentvotersinthesurvey
Theunderlyingexperimentconsistsof
n=25trials
p=Prob(success)=0.10
Theproblemasks:
a) Pr(X=0)
b) Pr(X4)
c) Pr(X 3)

425

 UsingTable1,wehave:
a) Pr(X=0)=0.0718
b) Pr(X4)=0.9020
c) HowaboutPr(X3)?RecallthatTable1only
displaysprobabilitiesoftheformPr(Xx).
Wehave
Pr(X 3)=1 Pr(X2)=1 0.5371=0.4629

426

BinomialDistributioninExcel
ExcelcancomputePr(X=x)andPr(Xx)whenXisa
binomialrandomvariable.
Thecommandis:
BINOM.DIST(number_s,trials,probability_s,cumulative)
Where:
Number_s :Thenumberofsuccessesintrials.
Trials :Thenumberofindependenttrials.
Probability_s :Theprobabilityofsuccessoneachtrial.
Cumulative :IfcumulativeisTRUE,thenBINOM.DIST
returnsthecumulativedistributionfunctionPr(X x);if
FALSE,itreturnstheprobabilityfunctionPr(X=x).
427

ExpectedValueandVariancefortheBinomial
Distribution
Asyoumightexpect,statisticianshavedeveloped
generalformulasforthemean,variance,and
standarddeviationofabinomialrandomvariable.
Theyare:

Asinpreviouscases,youneedtorememberthese
formulas
428

 Example7.93(continued):Constructanintervalsuch
that,withprobabilityatleast75%itwillincludethe
actualnumberofcustomersthatchoosetheleading
brand.
OK,toanswerthisquestion,wegobacktoChebysheffs
Theorem,whichstatesthat:Theprobabilitythata
randomvariableXlieswithinkstandarddeviationsof
itsmeanisatleast:
Sincewewantthistobeatleast75%,wefirstneedto
findtheksuchthat
1

Thisyields

0.75

.
429

 Next,recallthatintheexamplewehaven=25 andp=0.30
Therefore,usingtheexpectationandvarianceformulas
forBinomialrandomvariables,wehave:
E[X]=np =7.5 and
Therefore,anintervalthatwillinclude,withatleast75%
probability,theactualnumberofcustomerswhowill
choosetheleadingbrandis:
[7.5 2*2.291,7.5+2*2.291]=[2.918,12.082]
Thus,wecansaythatwithprobabilityatleast75%,
between3and12peoplewillchoosetheleadingbrand
inthisexample.
430

PoissonDistribution
NamedforSimeonPoisson,thePoissondistribution
isadiscreteprobabilitydistributionandreferstothe
numberofevents (a.k.a.successes)withinaspecific
timeperiodorregionofspace.
Forexample:
i.

Thenumberofcarsarrivingataservicestationin1
hour.(Theintervaloftimeis1hour.)
ii. Thenumberofflawsinaboltofcloth.(Thespecific
regionisaboltofcloth.)
iii. Thenumberofaccidentsin1dayonaparticular
stretchofhighway.(Theintervalisdefinedbyboth
time,1day,andspace,theparticularstretchof
highway.)
431

 DifferencebetweenBinomialandPoisson
Randomvariables:
Abinomialrandomvariableisthenumberof
successesinagivennumberoftrials,whereas
aPoissonrandomvariableisthenumberof
successesinanintervaloftimeorinaspecific
regionofspace.

432

ThePoissonExperiment
Likeabinomialexperiment,aPoissonexperiment
hasfourdefiningcharacteristicproperties:
i. Thenumberofsuccessesthatoccurinany
intervalisindependent ofthenumberof
successesthatoccurinanyotherinterval.
ii. Theprobabilityofasuccessinanintervalisthe
sameforallequalsizeintervals
iii. Theprobabilityofasuccessisproportionalto
thesizeoftheinterval.
iv. Theprobability ofmorethanonesuccessinan
intervalapproaches0astheintervalbecomes
smaller.
433

ThePoissonrandomvariable isthenumberof
successesthatoccurinaperiodoftimeoran
intervalofspaceinaPoissonexperiment.
successes

E.g.Onaverage,96 trucksarriveataborder
crossingeveryhour.
time period

E.g.Thenumberoftypographicerrorsinanew
textbookeditionaverages1.5 per100pages.
successes (?!)

interval
434

PoissonProbabilityDistribution
TheprobabilitythataPoissonrandomvariable
assumesavalueofx isgivenby:

ande isthenaturallogarithmbase.
TheexpectedvalueandvarianceofaPoisson
randomvariableXaregivenby:
435

 Example7.12:Astatisticsinstructorhasobserved
thatthenumberoftypographicalerrorsinnew
editionsoftextbooksvariesconsiderablyfrom
booktobook.Aftersomeanalysisheconcludes
thatthenumberoferrorsisPoissondistributed
withameanof1.5per100pages.
Theinstructorrandomlyselects100pagesofa
newbook.Whatistheprobabilitythatthereare
notypos?
436

 Thatis,whatisP(X=0)giventhat=1.5?

There is about a 22% chance of finding zero errors

Supposethattheinstructorhasjustreceivedacopyofa
newstatisticsbook.Henoticesthatthereare400pages.
a) Whatistheprobabilitythattherearenotypos?
b) Whatistheprobabilitythattherearefiveorfewer
typos?
437

 Howtoproceed?
First,notethatwearenowtalkingaboutan
intervalof400pages.
Intheoriginalstatementoftheproblem,we
weretoldthattheexpectednumberoftypos
inanintervalof100pageswas=1.5.
Therefore,theexpectednumberoftyposin
anintervalof400pagesis4*1.5=6
Thus,whenwedealwithanintervalof400
pages,wemustuse=6inthePoisson
distributionformula.
438

 Fora400pagebook,whatistheprobability
thatthereareno typos?
P(X=0)=

there is a very small chance there are no typos

439

 Fora400pagebook,whatistheprobabilitythat
therearefiveorless typos?
P(X5)=P(0)+P(1)++P(5)

Thisisrathertedioustosolvemanually.Abetter
alternativeistorefertoTable2 inAppendixB
k=5,=6,andP(Xk)=.446
there is about a 45% chance there are 5 or less typos
440

 Characterizearangeofvaluesthatwillincludetheactual
numberoftyposfoundina400pagebookwith
probabilityatleast90%.
Again,wecanuseChebysheffs Theorem.Sincewewant
thistobeatleast75%,wefirstneedtofindtheksuch
that

Thisyields

Next,recallthat,ifXisaPoissonrandomvariable,then
).
E[X]=and V(X)= (andtherefore,
IfXisthenumberoftyposin400pages,then
and
441

 Thus,theintervalis:
[6 3.162*2.449,6+3.162*2.449]=[1.743,13.743]

Wecannothaveanegativenumberoftypos,
sowecantruncatetheintervalatzero.
Thus,wecanstatethatwithprobabilityat
least90%,therewillbebetween0and13
typosina400pagebook.

442

PoissonDistributioninExcel
ExcelcancomputePr(X=x)andPr(Xx)whenX
isaPoissonrandomvariable.
Thecommandis:
POISSON.DIST(x,mean,cumulative)
Where:
x:Thenumberofevents(successes).
mean :Theexpectednumberofsuccessesper
interval.
Cumulative :IfcumulativeisTRUE,then
POISSON.DISTreturnsthecumulativedistribution
functionPr(Xx);ifFALSE,itreturnsthe
probabilityfunctionPr(X=x).
443

 Example:Exercise7.117: Thenumberofbank
robberiesthatoccurinalargeNorthAmerican
cityisPoissondistributedwithameanof1.5
perday. Findtheprobabilitiesofthefollowing
events:
a) Threeormorebankrobberiesoccurinaday.
a) Between10and15robberiesoccurduringa
5dayperiod.

444

 ThisisPr(X3).Again,touseTable2,weneedto
expressthisintermsofaprobabilityofthetype
Pr(Xk).Notethat:
Pr(X3)=1Pr(X2)
whereXisaPoissonrandomvariablewith=1.5
ThisisPr(10X15).Wehave:
Pr(10X15)=Pr(X15) Pr(X9)
whereXisPoissonwith=1.8*5=7.5

445

 UsingTable2inAppendixB,if=1.5,then
Pr(X2)=0.8088
andthereforePr(X3)=1Pr(X2)=0.1912.

Andif=7.5,then
Pr(X15)=0.9954 andPr(X9)=0.7764
andtherefore
Pr(10X15)=Pr(X15) Pr(X9)=0.219

446