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Discrete Probability
Distributions
Chap 5-1
Learning Objectives
In this chapter, you learn:
The properties of a probability distribution
Chap 5-2
Definitions
Random Variables
Chap 5-3
Chap 5-4
T
T
H
H
T
H
T
H
Probability Distribution
X Value
Probability
1/4 = 0.25
2/4 = 0.50
1/4 = 0.25
Probability
4 possible outcomes
Let X = # of heads.
0.50
0.25
X
Chap 5-5
Definitions
Random Variables
Random
Variables
Ch. 5
Discrete
Random Variable
Continuous
Random Variable
Ch. 6
Chap 5-6
Probability Distribution
Example:The following probability distribution table gives the distribution of the number of
interruptions per day in a large computer network.
Interruptions per Day
0
1
2
3
4
5
a.
b.
c.
Probability
0.35
0.25
0.20
0.10
0.05
0.05
= E(X) = xi P( X = xi )
i =1
P(X=xi)
0.25
0.50
0.25
Chap 5-9
2 = [x i E(X)]2 P(X = x i )
i =1
= 2 =
2
[x
E(X)]
P(X = x i )
i
i =1
where:
E(X) = Expected value of the discrete random variable X
xi = the ith outcome of X
P(X=xi) = Probability of the ith occurrence of X
Chap 5-10
= [ xi E(X)] P(X = x i )
2
Chap 5-11
Investment Returns
The Mean
Consider the return per $1000 for two types of
investments.
Investment
Economic Condition
Prob.
Passive Fund X
Aggressive Fund Y
0.2
Recession
- $25
- $200
0.5
Stable Economy
+ $50
+ $60
0.3
Expanding Economy
+ $100
+ $350
Chap 5-12
Investment Returns
The Mean
E(X) = X = (-25)(.2) +(50)(.5) + (100)(.3) = $ 50
E(Y) = Y = (-200)(.2) +(60)(.5) + (350)(.3) = $ 95
Interpretation: Fund X is averaging a $50.00 return
and fund Y is averaging a $95.00 return per $1000
invested.
Chap 5-13
Investment Returns
Standard Deviation
X = (-25 50) 2 (.2) + (50 50) 2 (.5) + (100 50) 2 (.3)
= 43.30
Y = (-200 95) 2 (.2) + (60 95) 2 (.5) + (350 95) 2 (.3)
= 193.71
Chap 5-14
Decision Making
Adam is thinking about investing $10,000 in two different
investment funds. The expected rates of return and the
corresponding probabilities for each fund are listed below.
50%
20%
20%
10%
Fund A
chance of an $800 profit
chance of an $1200 profit
chance of an $600 profit
chance of an $100 loss
30%
10%
40%
20%
Fund B
chance of an $2400 profit
chance of an $1900 profit
chance of an $200 profit
chance of an $400 loss
B:()=0.3(2400)+0.1(1900)+0.4(200)+0.2 (-400)=750
Chap 5-15
Decision Making
b. Find each standard deviation.
Fund A
Profit, X
P(X)
800
0.5
1200
0.2
600
0.2
-100
0.1
800 750
= 2500
1200 750
= 202,500
100 750
= 722,500
600 750
= 22,500
.P(X)
.P(X)
= ,
Decision Making
Fund B
Profit, X
P(X)
2400
0.3
1900
0.1
-200
0.4
-400
0.2
2400 750
1900 750
2
2
200 750
400 750
= 2,722,500
= 1,322,500
= 902,500
= 1,322,500
.P(X)
.P(X)
= , ,
Decision Making
c. Comment on the two investments.
While the funds have identical expected values, the standard deviation of
Fund B is almost four times the standard deviation for Fund A. This means
that Fund B will have about four times the variability than Fund A and hence
riskier.
Chap 5-18
Practice
The information below is the number of daily emergency service calls made
by the volunteer ambulance service in Dubai.
Number of Calls X
Frequency
0
1
2
3
4
5
3
5
6
2
4
3
Chap 5-19
Practice
a) Convert the information on the number of calls to a probability distribution.
d) Using the frequency table (or probability distribution table), what is the probability that
tomorrow the number of phone calls is less than 3 calls?
e) Using the frequency table what is the probability that tomorrow the number of phone calls is
greater than 3 calls?
Chap 5-20
Solution
a.
Number of Calls X
Frequency
P( X )
0
1
2
3
4
5
3
5
6
2
4
3
3/23 = 0.13
5/23 = 0.22
6/23 = 0.26
2/23 = 0.09
4/23 = 0.17
3/23 = 0.13
b. Discrete probability distribution, because the number of calls X is a discrete random variable.
c. = = 2.34
d. 3 = 0.61 61 %
e. 3 = 0.3 30 %
Chap 5-21