Mean and Variance of Random Variables

Mean
The mean of a discrete random variable X is a weighted average of the possible
values that the random variable can take. Unlike the sample mean of a group of
observations, which gives each observation equal weight, the mean of a random
variable weights each outcome xi according to its probability, pi. The common
symbol for the mean (also known as the expected value of X) is
defined by

, formally

The mean of a random variable provides the long-run average of the variable, or
the expected average outcome over many observations.

Example
Suppose an individual plays a gambling game where it is possible to lose $1.00,
break even, win $3.00, or win $10.00 each time she plays. The probability
distribution for each outcome is provided by the following table:
Outcome
Probability

-$1.00 $0.00
0.30
0.40

$3.00
0.20

$5.00
0.10

The mean outcome for this game is calculated as follows:

= (-1*.3) + (0*.4) + (3*.2) + (10*0.1) = -0.3 + 0.6 + 0.5 = 0.8.
In the long run, then, the player can expect to win about 80 cents playing this game
-- the odds are in her favor.
For a continuous random variable, the mean is defined by the density curve of the
distribution. For a symmetric density curve, such as the normal density, the mean
lies at the center of the curve.
The law of large numbers states that the observed random mean from an
increasingly large number of observations of a random variable will always
approach the distribution mean . That is, as the number of observations
increases, the mean of these observations will become closer and closer to the true
mean of the random variable. This does not imply, however, that short term
averages will reflect the mean.

In the above gambling example, suppose a woman plays the game five times, with
the outcomes $0.00, -$1.00, $0.00, $0.00, -$1.00. She might assume, since the true
mean of the random variable is $0.80, that she will win the next few games in order
to "make up" for the fact that she has been losing. Unfortunately for her, this logic
has no basis in probability theory. The law of large numbers does not apply for a
short string of events, and her chances of winning the next game are no better than
if she had won the previous game.
Properties of Means
If a random variable X is adjusted by multiplying by the value b and adding the
value a, then the mean is affected as follows:

Example
In the above gambling game, suppose the casino realizes that it is losing money in
the long term and decides to adjust the payout levels by subtracting $1.00 from
each prize. The new probability distribution for each outcome is provided by the
following table:
Outcome
Probability

-$2.00 -$1.00
0.30
0.40

$2.00
0.20

$4.00
0.10

The new mean is (-2*0.3) + (-1*0.4) + (2*0.2) + (4*0.1) = -0.6 + -0.4 + 0.4 + 0.4 =
-0.2. This is equivalent to subtracting $1.00 from the original value of the mean, 0.8
-1.00 = -0.2. With the new payouts, the casino can expect to win 20 cents in the
long run.
Suppose that the casino decides that the game does not have an impressive enough
top prize with the lower payouts, and decides to double all of the prizes, as follows:
Outcome
Probability

-$4.00 -$2.00
0.30
0.40

$4.00
0.20

$8.00
0.10

Now the mean is (-4*0.3) + (-2*0.4) + (4*0.2) + (8*0.1) = -1.2 + -0.8 + 0.8 + 0.8 =
-0.4. This is equivalent to multiplying the previous value of the mean by 2,
increasing the expected winnings of the casino to 40 cents.
Overall, the difference between the original value of the mean (0.8) and the new
value of the mean (-0.4) may be summarized by (0.8 - 1.0)*2 = -0.4.
The mean of the sum of two random variables X and Y is the sum of their
means:

For example, suppose a casino offers one gambling game whose mean winnings are
-$0.20 per play, and another game whose mean winnings are -$0.10 per play. Then
the mean winnings for an individual simultaneously playing both games per play
are -$0.20 + -$0.10 = -$0.30.

Variance
The variance of a discrete random variable X measures the spread, or variability, of
the distribution, and is defined by

The standard deviation

is the square root of the variance.

Example
In the original gambling game above, the probability distribution was defined to be:
Outcome
Probability

-$1.00 $0.00
0.30
0.40

$3.00
0.20

$5.00
0.10

The variance for this distribution, with mean = 0.8, may be calculated as follows:
(-1 - 0.8)2*0.3 + (0 - 0.8)2*0.4 + (3 - 0.8)2*0.2 + (5 - 0.3)2*0.1
= (-1.8)2*0.3 + (-0.8)2*0.4 + (2.2)2*0.2 + (4.2)2*0.1
= 3.24*0.3 + 0.64*0.4 + 4.84*0.2 + 17.64*0.1
= 0.972 + 0.256 + 0.968 + 1.764 = 3.960, with standard deviation = 1.990.
Since there is not a very large range of possible values, the variance is small.
Properties of Variances
If a random variable X is adjusted by multiplying by the value b and adding the
value a, then the variance is affected as follows:

Since the spread of the distribution is not affected by adding or subtracting a

constant, the value a is not considered. And, since the variance is a sum of squared
terms, any multiplier value b must also be squared when adjusting the variance.

Example
As in the case of the mean, consider the gambling game in which the casino
chooses to lower each payout by $1.00, then double each prize. The resulting
distribution is the following:
Outcome
Probability

-$4.00 -$2.00
0.30
0.40

$4.00
0.20

$8.00
0.10

The variance for this distribution, with mean = -0.4, may be calculated as follows:
(-4 -(-0.4))2*0.3 + (-2 - (-0.4))2*0.4 + (4 - (-0.4))2*0.2 + (8 - (-0.4))2*0.1
= (-3.6)2*0.3 + (-1.6)2*0.4 + (4.4)2*0.2 + (8.4)2*0.1
= 12.96*0.3 + 2.56*0.4 + 19.36*0.2 + 70.56*0.1
= 3.888 + 1.024 + 3.872 + 7.056 = 15.84, with standard deviation = 3.980.
This is equivalent to multiplying the original value of the variance by 4, the square
of the multiplying constant.
For independent random variables X and Y, the variance of their sum or
difference is the sum of their variances:

Variances are added for both the sum and difference of two independent random
variables because the variation in each variable contributes to the variation in each
case. If the variables are not independent, then variability in one variable is related
to variability in the other. For this reason, the variance of their sum or difference
may not be calculated using the above formula.
For example, suppose the amount of money (in dollars) a group of individuals
spends on lunch is represented by variable X, and the amount of money the same
group of individuals spends on dinner is represented by variable Y. The variance of
the sum X + Y may not be calculated as the sum of the variances, since X and Y may
not be considered as independent variables.