E370

5/13/17
Expected Values:
Discrete Random
Variables Sums of
Random Variables
Discrete variables
can assume only a countable number of
different values
gaps between values along the number line
It is possible to list all X values and the
associated P(X) in Probability Distributions
Random variables
Actual outcomes are determined by chance.
Notation:
X outcome
P(X) probability of an outcome

Discrete Random Variables

 This Thisis also a
is a frequency
distribution: probability
Number of drinks distribution for a
consumed per random variable:
occasion by E370 Number of drinks
students who
fi / fi = consumed per
X
classified themselves X P(X)
occasion by E370
fi/n
as Light Drinkers students
0 who0.56
0 0.56 classified themselves
1 0.13
as Light Drinkers
1 0.13
2 0.07
2 0.07
3 0.07
3 0.07
4 0.04
4 0.04
5 0.13 5 0.13
What
is the expected number of
drinks consumed per occasion by
light-drinking E370 students?
P(X
X Products Sum
)
0 0.56 =0*0.56 = 0 0
1 0.13 =1*0.13 = 0.13 +0.13
2 0.07 =2*0.07 = 0.14 +0.14
3 0.07 =3*0.07 = 0.21 +0.21
4 0.04 =4*0.04 = 0.16 +0.16
5 0.13 =5*0.13 = 0.65 +0.65 = 1.29

Expected Values
What
is the expected number of
drinks consumed per occasion by
light-drinking E370 students?
P(X
X Products Sum
)
0 0.56 =0*0.56 = 0 0
1 0.13 =1*0.13 = 0.13 +0.13
2 0.07 =2*0.07 = 0.14 +0.14
3 0.07 =3*0.07 = 0.21 +0.21
4 0.04 =4*0.04 = 0.16 +0.16
5 0.13 =5*0.13 = 0.65 +0.65 = 1.29

Expected Values
What
is the expected number of
drinks consumed per occasion by
light-drinking E370 students?
P(X
X Products Sum
)
0 0.56 =0*0.56 = 0 0
1 0.13 =1*0.13 = 0.13 +0.13
2 0.07 =2*0.07 = 0.14 +0.14
3 0.07 =3*0.07 = 0.21 +0.21
4 0.04 =4*0.04 = 0.16 +0.16
5 0.13 =5*0.13 = 0.65 +0.65 = 1.29

Expected Values
What

is the expected variance of the

number of drinks consumed per occasion by
light-drinking E370 students?

(X-
P( (X- (X-
X E(X))2*P(X
X) E(X)) E(X))2
)
0.5 (0- (0- 0.93189
0 (0-1.29)
6 1.29)2 1.29)2*0.56 6
0.1 (1- (1- +
1 (1-1.29)
3 1.29)2 1.29)2*0.13 0.010933
0.0 (2- (2- +
2 (2-1.29)
7 1.29)2 1.29)2*0.07 0.035287
0.0 (3- (3- +
3 (3-1.29)
More Expected Values
7
0.0
1.29)2
(4-
1.29)2*0.07
(4-
0.204687
+
4 (4-1.29)
4 1.29)2 1.29)2*0.04 0.293764
What

is the expected variance of the

number of drinks consumed per occasion by
light-drinking E370 students?

(X-
P( (X- (X-
X E(X))2*P(X
X) E(X)) E(X))2
)
0.5 (0- (0- 0.93189
0 (0-1.29)
6 1.29)2 1.29)2*0.56 6
0.1 (1- (1- +
1 (1-1.29)
3 1.29)2 1.29)2*0.13 0.010933
0.0 (2- (2- +
2 (2-1.29)
7 1.29)2 1.29)2*0.07 0.035287
0.0 (3- (3- +
3 (3-1.29)
More Expected Values
7
0.0
1.29)2
(4-
1.29)2*0.07
(4-
0.204687
+
4 (4-1.29)
4 1.29)2 1.29)2*0.04 0.293764
What

is the expected variance of the

number of drinks consumed per occasion by
light-drinking E370 students?

(X-
P( (X- (X-
X E(X))2*P(X
X) E(X)) E(X))2
)
0.5 (0- (0- 0.93189
0 (0-1.29)
6 1.29)2 1.29)2*0.56 6
0.1 (1- (1- +
1 (1-1.29)
3 1.29)2 1.29)2*0.13 0.010933
0.0 (2- (2- +
2 (2-1.29)
7 1.29)2 1.29)2*0.07 0.035287
0.0 (3- (3- +
3 (3-1.29)
More Expected Values
7
0.0
1.29)2
(4-
1.29)2*0.07
(4-
0.204687
+
4 (4-1.29)
4 1.29)2 1.29)2*0.04 0.293764
What

is the expected variance of the

number of drinks consumed per occasion by
light-drinking E370 students?

(X-
P( (X- (X-
X E(X))2*P(X
X) E(X)) E(X))2
)
0.5 (0- (0- 0.93189
0 (0-1.29)
6 1.29)2 1.29)2*0.56 6
0.1 (1- (1- +
1 (1-1.29)
3 1.29)2 1.29)2*0.13 0.010933
0.0 (2- (2- +
2 (2-1.29)
7 1.29)2 1.29)2*0.07 0.035287
0.0 (3- (3- +
3 (3-1.29)
More Expected Values
7
0.0
1.29)2
(4-
1.29)2*0.07
(4-
0.204687
+
4 (4-1.29)
4 1.29)2 1.29)2*0.04 0.293764
 Expected Variance = 3.27drinks2
Standard Deviation = SQRT(3.27) =
1.81 drinks
Is that a lot of variability or a little?
Tointerpret a statistic, we need context.
The range of the variable is 5.
The expected value is 1.29.
Two standard deviations above the mean
takes us almost to 5.
We cant go two standard deviations below
the mean because we run into 0 and we
cant have negative drinks.

Some meaning please!



Summary of Expected Value

Formulas For Discrete Data
 An automobile insurance company estimates
the following loss probabilities for the next
year on a $10,000 motorcycle. What is the
expected loss, the expected standard
deviation of loss, and the value of the
Loss loss? (X )*P( (X E(X))22
median
% P(Los i ii
Valu
Loss s) Xi) *P(Xii)
e
(10000-
(10000-
Total 285)
285)22*0.001
*0.001
loss 10000 0.001 10 =94381.23
=94381.23
50%
loss 5000 0.010 50 222312.3
222312.3
25%
Practice
loss 2500 0.050 expected
125 245311.3
245311.3

values
10%
loss 1000 0.100 100 51122.5
51122.5
0% loss0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40
 An automobile insurance company estimates
the following loss probabilities for the next
year on a $10,000 motorcycle. What is the
expected loss, the expected standard
deviation of loss, and the value of the
Loss loss? (X )*P( (X E(X))22
median
% P(Los i ii
Valu
Loss s) Xi) *P(Xii)
e
(10000-
(10000-
Total 285)
285)22*0.001
*0.001
loss 10000 0.001 10 =94381.23
=94381.23
50%
loss 5000 0.010 50 222312.3
222312.3
25%
Practice
loss 2500 0.050 expected
125 245311.3
245311.3

values
10%
loss 1000 0.100 100 51122.5
51122.5
0% loss0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40
 An automobile insurance company estimates
the following loss probabilities for the next
year on a $10,000 motorcycle. What is the
expected loss, the expected standard
deviation of loss, and the value of the
Loss loss? (X )*P( (X E(X))22
median
% P(Los i ii
Valu
Loss s) Xi) *P(Xii)
e
(10000-
(10000-
Total 285)
285)22*0.001
*0.001
loss 10000 0.001 10 =94381.23
=94381.23
50%
loss 5000 0.010 50 222312.3
222312.3
25%
Practice
loss 2500 0.050 expected
125 245311.3
245311.3

values
10%
loss 1000 0.100 100 51122.5
51122.5
0% loss0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40
 An automobile insurance company estimates
the following loss probabilities for the next
year on a $10,000 motorcycle. What is the
expected loss, the expected standard
deviation of loss, and the value of the
Loss loss? (X )*P( (X E(X))22
median
% P(Los i ii
Valu
Loss s) Xi) *P(Xii)
e
(10000-
(10000-
Total 285)
285)22*0.001
*0.001
loss 10000 0.001 10 =94381.23
=94381.23
50%
loss 5000 0.010 50 222312.3
222312.3
25%
Practice
loss 2500 0.050 expected
125 245311.3
245311.3

values
10%
loss 1000 0.100 100 51122.5
51122.5
0% loss0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40
 An automobile insurance company estimates
the following loss probabilities for the next
year on a $10,000 motorcycle. What is the
expected loss, the expected standard
deviation of loss, and the value of the
Loss loss? (X )*P( (X E(X))22
median
% P(Los i ii
Valu
Loss s) Xi) *P(Xii)
e
(10000-
(10000-
Total 285)
285)22*0.001
*0.001
loss 10000 0.001 10 =94381.23
=94381.23
50%
loss 5000 0.010 50 222312.3
222312.3
25%
Practice
loss 2500 0.050 expected
125 245311.3
245311.3

values
10%
loss 1000 0.100 100 51122.5
51122.5
0% loss0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40
 An automobile insurance company estimates
the following loss probabilities for the next
year on a $10,000 motorcycle. What is the
expected loss, the expected standard
deviation of loss, and the value of the
Loss loss? (X )*P( (X E(X))22
median
% P(Los i ii
Valu
Loss s) Xi) *P(Xii)
e
(10000-
(10000-
Total 285)
285)22*0.001
*0.001
loss 10000 0.001 10 =94381.23
=94381.23
50%
loss 5000 0.010 50 222312.3
222312.3
25%
Practice
loss 2500 0.050 expected
125 245311.3
245311.3

values
10%
loss 1000 0.100 100 51122.5
51122.5
0% loss0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X) = $825.40
V(X) = 681275
 An automobile insurance company estimates
the following loss probabilities for the next
year on a $10,000 motorcycle. What is the
expected loss, the expected standard
deviation of loss, and the value of the
Loss loss? (X )*P( (X E(X))22
median
% P(Los i ii
Valu
Loss s) Xi) *P(Xii)
e
(10000-
(10000-
Total 285)
285)22*0.001
*0.001
loss 10000 0.001 10 =94381.23
=94381.23
50%
loss 5000 0.010 50 222312.3
222312.3
25%
Practice
loss 2500 0.050 expected
125 245311.3
245311.3

values
10%
loss 1000 0.100 100 51122.5
51122.5
0% loss0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X) = $825.40
V(X) = 681275
What does the loss function look
like?

Continuing the problem

1. Recognize a valid probability (frequency)
distribution.
2. Recognize that the answer is a dollar value,
and translate % loss to dollars.
3. Sketch a frequency polygon (or histogram)
correctly.
4. Calculate expected value.
5. Calculate expected standard deviation.
6. Definition of a median.
7. Correctly interpret graph.
8. Correctly interpret statistics.

What concepts were

necessary for this problem?
Univariate Random Variables
Those we measure or count from raw
data

Multivariate Random
Variables
We COULD measure and/or count these,
but we can also get them by adding
Univariate Random Variables, also
called combinations.

Where do random variables come from?

LINEAR

What does that mean? A variable can

have a constant added to or subtracted from it,
be multiplied or divided by a constant,
be added to or subtracted from another variable,
or any combination of the above.
If the formula for the new variable contains
functions such as square roots or logarithms, then
the combination is not linear.
For example, if Y = 3X1 + 2X2 then Y is a
linear combination of the variables X 1 and
X2 .

What is the most common

combination method?
Ifwe add random
variables then the new
variable is also random.
o That means it must have a
distribution.
o That means it must have
expected values.

New Random Variables

 Original
Original
data times
data plus c
Statistic c
Changes . .
Changes . .
.
.
Mean +c c*
Median MED + c c*MED
Mode Mode + c c*Mode
Range No Change c*Range
Variance No Change c2*2
St. Deviation No Change |c|*

Summary
 The president of Midwest Foods is
thinking of building a meat
distribution facility on the outskirts
of Chicago. Contribution per pound
to profits is known to be $0.40 for
pork and $0.50 for beef. The
president is interested in overall
profits. Define a relevant random
variable.

TP = 0.4*P + 0.5*B
A practical problem
 Itis known that expected pork
sales per month are 2300 pounds.
Expected beef sales per month
are 4200. Calculate the expected
value of profits.
E(TP) = E(0.4P + 0.5B)
= E(0.4P) + E(0.5B)
= 0.4*E(P) + 0.5*E(B)
= 0.4*2300 + 0.5*4200
= 920 + 2100 = $3,020

Expected Value
The expected value of the sum
of random variables is the sum
of the expected values of its
parts.
For S= aX + bY + c
E(S) =E(aX + bY + c)
=E(aX) + E(bY) + (E(c))
=a*E(X) + b*E(Y) + c
(E(c) = c)

Big News
 Theexpected standard deviation
of pork sales is1187 pounds; the
expected standard deviation of
beef sales is 1400 pounds.
Calculate the expected standard
deviation of profits, assuming
pork and beef sales are
independent of one another.
o Calculate Variance
o Take Square Root of it.

Independent
Expected Standard Deviation
V(TP) = V(0.4*P + 0.5*B)

=V(0.4*P) + V(0.5*B)

=(0.4)2 *V(P) + (0.5)2 *V(B)

=(0.16) *(1408969) + (0.25) * (1960000)

=225435.04 + 490000 = 715435.04

Thus,
the standard deviation is
=SQRT(715435.04) = $845.83

Variance Calculations
The expected variance of the
sum of random variables is the
sum of the expected variances
of its parts . . .
For S= aX + bY + c
V(S) = V(aX + bY + c)
=V(aX) + V(bY) + V(c)
=a2*V(X) + b2*V(Y) + 0
V(c) = 0
(. . . plus the expected covariances of its
variable pairs.)
More Big News
 The covariance between pork and beef sales
is 1,160,000. Calculate the expected
standard deviation of profits that includes this
information.
Must include the variation from between the
variables: 2*a*b*pb = 2*(0.4)*(0.5)*(1160000)
= 64,000
715435.04 + (64,000) = 651435.04
Thus, the standard deviation is
=SQRT(651435.04) = $807.12

Dependent
Expected Standard Deviation
Expected Values of
Sums of 2 Random Variables

E(aX+bY)=aE(X) + bE(Y) = ax +
by

V(aX+bY)=a2V(X) + b2V(Y) +
2abCOV(X,Y)
= a22x + b22y +2abxy

Expected Values Summary

Expected Values of
Sums of 3 Random Variables
E(aX+bY+cZ)=aE(X) + bE(Y) +
cE(Z)
= ax + by + cz
V(aX+bY+cZ)=a2V(X)+b2V(Y)
+c2V(Z)
+2abCOV(X,Y)+2bcCOV(Y,Z)
+2caCOV(Z,X)
Expected 2 2 Values
= a +b +c
2 2 2 2 Summary
x y z
 IBM stock has an expected value of
$91.40 and a standard deviation of
$2.22. Microsoft stock has an expected
value of $29.20 and a standard
deviation of $0.83. A portfolio consists
of 2 shares of each stock. Write the
formula for the total value of the
portfolio.
What is the expected value of the
portfolio?
What is the expected variance in value
of the portfolio, assuming the stocks
are unrelated?
A portfolio example
The stocks have a correlation
coefficient of 0.95. Given this
additional information, how would your
 TVP=2I + 2M

E(TVP)=E(2I + 2M) = 2*E(I) + 2*E(M) =

2*(91.40)+2*(29.20) = 182.80 + 58.40 =
$241.20

V(TVP)=V(2I + 2M) = 22*V(I) + 22*V(M)

= 4*V(I) + 4*V(M) = 4*4.9284 + 4*0.6889
= 19.7136 + 2.7556 = 22.4692

sTVP = SQRT(22.4692) = 4.74

Statistics


Covariance Term:

TotalVariance: 22.4692 + 14.00 =

36.4692

stvp= SQRT(36.4392) = 6.04

How do we use the correlation?

 Mr.Tippler of the Teetotal party
presented us with a linear
combination of random variables with
respect to trade between the US and
Barbados: Xn = X M. X is exports
of US goods to Barbados; M is imports
of Barbados goods by US; Xn is net
exports. Tippler's investigations have
Variabl information:
yielded the following Mea St
e n Dev
Imports
200 30
(M)
Net Exports, Xn
Exports
(X) 75 25
 According to Tippler, what is expected net
exports?
E(Xn)= E(X) E(M) = 75-200 = 125
What is the variance of net exports,
assuming X and M are independent?
V(Xn)= V(X M) = V(X) + V(M) = 252 + (30)2
=1525
Are X and M independent?
Tippler discovered that the correlation
coefficient between X and M is -0.50. Does
this change the variance in the previous
question? If so, by how much? If not, why
not?

Questions
r
= 0.50
Yes
If r = 0.50

The covariance term:

Total variance:
Standard Deviation of Xn=
SQRT(2275) = $47.70

So, are X & M Related?