PERMUTATIONS AND COMBINATIONS

Applied Sta+s+cs and Compu+ng Lab Indian School of Business

Applied Sta+s+cs and Compu+ng Lab

Learning Goals
Basic principle of coun6ng Combina6ons Permuta6ons

Applied Sta+s+cs and Compu+ng Lab

An Example
A man is looking to make 3 investments. He wishes to invest in one of the following types of assets: Government Bonds, Mutual Funds, Land and Precious Metals. He has narrowed down to 3 dierent Government Bonds, 3 dierent Mutual Funds and Gold, Silver and Pla6num under Precious Metals. How many op6ons does he have? We can try coun6ng them! It is not an impossible task but it is good to know that there is a simpler yet eec6ve method to count the number of possible combina6ons of these assets
Applied Sta+s+cs and Compu+ng Lab
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An Example (Contd)

Investments Combina6on

Government Bonds Bond A Bond B Bond C Mutual Fund A

Mutual Funds Mutual Fund B Mutual Fund c

Precious Metals

Pla6num

Gold

Silver

Applied Sta+s+cs and Compu+ng Lab

The Principle of Coun6ng

The Principle states that: If p tasks are performed, each with np possible ways to complete, then there are a total of n ways in which the p tasks can be completed Using this principle we have :
p i i =1

3 dierent assets (Bonds, Mutual Funds and Metals) 3 dierent types in each asset So we have a 333 = 27 op6ons! So the investor can invest in 27 dierent ways
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Applied Sta+s+cs and Compu+ng Lab

Permuta6on
A rm has resources enough to invest in 3 possible opportuni6es. There are 4 possible opportuni6es: A, B, C and D Each of these opportuni6es need dierent amounts of ini6al investments. Once the company selects the rst opportunity, the next one will depend on how much resources are le\ a\er paying for the rst one. It must now choose ANY 3 out of these in such a manner that it balances out its resources. How many possible op6ons does the rm have? These are only a few. The order in Let us list a few: which these opportuni6es are A B C selected is important because the resources have to be distributed A C B accordingly. We call each of these B C A arrangements a Permuta+on, i.e. (A,B,C) is one permuta6on, (C,A,B) C B A is another. Now, the ques6on is how do we count the number of permuta6ons without lis6ng them all?
Applied Sta+s+cs and Compu+ng Lab

Number of Permuta6ons/Arrangements
Let us apply the principle of coun6ng: The rst opportunity can be any of the 4 The second any of the remaining 3 The third one of the remaining 2 So we have 432 = 24 op6ons! In general, the number of permuta6ons of n objects is

n (n 1) (n 2).......... 2 1 = n!
Suppose that there are 20 opportuni6es to choose from. How many dierent permuta6ons of 3 do we have now? 20! 20! = Using the same principle as above we have: 20 19 18 = 17! (20 3)! In general, the number of permuta6ons of size r from a total of n objects is given by:
n

n! Pr = (n r )!
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Applied Sta+s+cs and Compu+ng Lab

Combina6on
Suppose that all the opportuni6es were equal in investment and return amounts, the rm then would not dieren6ate the order in which the opportuni6es were selected In this case (A,B,C) is the same as (C,A,B), i.e. (A,B,C) , (A,C,B), (B,A,C), (B,C,A),(C,A,B) & (C,B,A) are all the same to the rm The interest is in {A,B,C} This is called a Combina+on, the order in which items are selected does not majer, we are simply selec6ng a set Our only op6ons here are:
A A A B
Applied Sta+s+cs and Compu+ng Lab

B B C C

C D D D
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Number of Combina6ons
Let us say we need to select r item from n The number of permuta6ons is: n!

(n r )!
We know that these already include the selec6on and that the selec6on is counted more than once A selec6on of size r has r! dierent permuta6ons So to adjust for the extra coun6ng we divide by r! Therefore, the number of possible selec6ons is

n! 1 (n r )! r !
This is denoted by
n

!n$ Cr or # & "r %

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Applied Sta+s+cs and Compu+ng Lab

Thank you

Applied Sta+s+cs and Compu+ng Lab