Stat 330 Spring 2009 Homework 7

1 Convenience Sample
The average time between customers arriving at a store is 10 minutes. The inter-arrival times are indepen-
dent and exponentially distributed. Every fifth customer receives a questionnaire. (Specifically, only the
5th , 10th , 15th , ... customers receive questionnaires.)
(a.) What is the distribution of the time until the arrival of the first customer? (Give the name of the
distribution and the value(s) of parameter(s).) On one slow morning, no customers have arrived by
9:00 am. Now, what is the expected time of the arrival of the first customer? (Justify your answer.)
Let T1 = Time until first customer Since inter-arrival times are exponential, T1 ∼ Exponential(λ). We
need to specify λ. Because E[T1 ] = 10 = λ1 , λ = 0.1customers/minute. If we know that no customer
arrives in the first hour, then by the memoriless property of the exponential distribution, the time until
the arrival of the first custome is still exponential, and the arrival rate is still 0.1 customers/minute.
(b.) What is the distribution of the time the store owner waits until he gives the first questionnaire? (Give
the name of the distribution and the value(s) of parameter(s).) If the store opens at 8:00 am, at what
time does the store owner expect to give the first questionnaire? What is the probability that the store
owner gives the first questionnaire after 9:00 am?
Let T be the number of minutes the store owner waits until he gives the first questionnare. Then,
T = T1 + . . . + T5 , where Ti ∼ iid Exponenential(0.1). By the definition of the Erlang distribution.
T ∼ Erlang(K = 5, λ = 0.1). The store owner gives the first questionnaire after 9:00am if T > 60
mintues, and
P (T > 60) = 1 − P (T ≤ 60)
= 1 − Erlang5,0.1 (60)
= 1 − (1 − P o(0.1)(60) (5 − 1)) (look up the Poisson in the table)
= P o(6) (4) ≈ 0.285

(c.) At 1pm, the store owner takes a lunch break. What is the distribution of the number of customers who
arrive before the lunch break? (Give the name of the distribution and the value of the parameter.)
How many customers does the owner expect will arrive before the lunch break?
Let N be the number of customers who arrive in the first 300 minutes (i.e., before the lunch break). Be-
cause exponential waiting times mean Poisson arrivals (See Hofmann, Theorem 2.4.3), N ∼ Poisson(0.1∗
300 = 30), and E[N ] = 30. The
(d.) One morning, the store owner realizes that he only has 3 questionnaires left. He will print more
questionnaires during his lunch break. What is the probability that the store owner runs out of
questionnaires before his lunch break?
The store owner runs out of questionnaires before the lunch break if N (defined in the solution to part
c) is greater than or equal to 15. Then,
P (runs out before lunch) = P (N ≥ 15)
= 1 − P (N ≤ 14)
= 1 − P o30 (14) ≈ 1 (0.999)

We can obtain P o30 (14), the cdf of a Poisson r.v. with a mean of 30 evaluated at 14, from the table of
CDF’s. We can alternatively use the normal approximation to the poisson, and compute
 
W − 30 14 − 30 14 − 30
P (W ≤ 14) ≈ P ( √ ≤ √ )=Φ √
30 30 30

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 2 Playing CDs
Assume that the playing time of jazz CDs has a normal distribution with a mean of 52 minutes and a
standard deviation of 7 minutes.

(a) If you select a random jazz CD from the sale’s stack has a playing time of less than 45 minutes?
Let X be the playing time of a Jazz CD. Then X ∼ N (52, 72 ) and

P (X ≤ 45) = N52,72 (45) = N0,1 ((45 − 52)/7) = 1 − N0,1 (1) = 1 − 0.8413 = 0.1587.

(b) What percentage of jazz CDs play between 45 and 59 minutes?

P (45 ≤ X ≤ 59) = N52,72 (59) − N52,72 (45) = N0,1 (1) − N0,1 (−1) = 2 · 0.8413 − 1 = 0.6826.

(c) Determine the percentage of jazz CDs that fall within a range of ±2σ around the mean playing
time.

P (52−2σ ≤ X ≤ 52+2σ) = P (38 ≤ X ≤ 66) = N52,72 (66)−N52,72 (38) = 2N0,1 (2)−1 = 2·0.9772−1 = 0.9544.

(d) Determine the percentage of jazz CDs that fall within a range of ±3σ around the mean playing
time.

P (52 − 3σ ≤ X ≤ 52 + 3σ) = 2N0,1 (3) − 1 = 2 · 0.9987 − 1 = 0.9964.

(e) What is the relative frequency of jazz CDs with playing time X exactly 45 minutes?

P (X = 45) = 0

(f) What is the relative frequency of jazz CDs with playing time over 1 hour?

P (X ≥ 60) = 1 − N0,1 (8/7) = 1 − 0.8729 = 0.1271.

(g) Given that a randomly chosen CD has been playing for 59 minutes, what is the conditional
probability that the CD continues to play for at least 14 more minutes? Let X be the playing time
of a randomly chosen CD. By the definition of conditional probability,
P (X > 73 and X > 59)
P (X > 73|X > 59) =
P (X > 59)
P (X > 73)
=
P (X > 59)
P (X > µ + 3σ)
=
P (X > µ + σ)
P (Z > 3)
= , where Z ∼ N(0, 1)
P (Z > 1)
1 − Φ(3)
=
1 − Φ(1)
= 0.0085.

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3 NY Stock Exchange
For 1998 as a whole, the mean return of all common stocks listed on the New York Stock Exchange
(NYSE) was µ = 16% and standard deviation σ = 26%. Assume that the distribution of returns is
roughly normal.

(a) What % of stocks lost money?

Let X be the mean return of a stock. Then X ∼ N (0.16, 0.262 ) and

P (X < 0) = N (0.16, 0.262 )(0) = N0,1 (−0.16/0.26) = 1 − N0,1 (0.62) = 1 − 0.7324 = 0.2676.

(b) Suppose we create a portfolio of 8 stocks by randomly selecting stocks from the NYSE and
investing equal amounts of money in each stock. What are the mean and standard deviation of
the sample mean returns for these 8 stocks?
Let Xi be one of the eight selected stocks, with i = 1, 2, .., 8. Then the mean return of the portfolio
is P F = 1/8 · (X1 + X2 + ... + X8 ). From the propagating property of the normal distribution we
then know, that P also has a normal distribution with P F ∼ N (0.16, 0.262 /8)
(c) What is the probability the portfolio loses money? Explain the difference between this result and
that of part (a)?

P (P F < 0) = N (0.16, 0.262 /8)(0) = N0,1 (−0.16/0.0919) = 1−N0,1 (1.74) = 1−0.9591 = 0.0409.

Since we are looking at the average return rate of eight stocks, the variance is a lot lower and
therefore the probability that the portfolio loses money is also reduced.
(d) The probability is 0.05 that a portfolio constructed this way has a return of more than 31.16%,
because:

P (P F > x) ≤ 0.05
⇐⇒ P (P F ≤ x) ≥ 0.95
⇐⇒ N0.16,0.09192 (x) ≥ 0.95
⇐⇒ N0,1 ((x − 0.16)/0.0919) ≥ 0.95
⇐⇒ (x − 0.16)/0.0919 ≥ 1.65
⇐⇒ x ≥ 0.16 + 0.0919 · 1.65 = 0.3116

4 Apple-Tree Farm
Able and Baker are both apple-tree farmers (they grow apple trees). Assume, that apple trees grow
according to a normal distribution.
On the Able Farm, trees grow with a mean of 1m per year and a standard deviation of 25 cm. Baker
manages to get an average growth of 1.1m per year with a standard deviation of 35cm.
For the following questions again state each time which random variable you use and what distribution
assumption you make.

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(a) What is the probability for a tree on the Able Farm to grow more than 1.2m in a year? what if
the tree was on the Baker Farm?
Let X be the growth of a tree on the Able farm in one year; then X ∼ Nµ=1,σ2 =0.252

standardization
P (X > 1.2) = 1 − P (X ≤ 1.2) = 1 − Nµ=1,σ2 =0.252 (1.2) =
1.2 − 1 table
= 1 − N0,1 ( ) = 1 − N0,1 (0.8) = 1 − 0.7881 = 0.2119.
0.25
Analogously, for Y := growth of a tree on the Baker farm in one year; then Y ∼ Nµ=1.1,σ2 =0.352

standardization
P (Y > 1.2) = 1 − P (Y ≤ 1.2) = 1 − Nµ=1.1,σ2 =0.352 (1.2) =
1.2 − 1.1 table
= 1 − N0,1 ( ) ≈ 1 − N0,1 (0.29) = 1 − 0.6141 = 0.3859.
0.35

(b) What is the probability for a tree on the Able Farm to grow less than .8m in a year? what if the
tree was on the Baker Farm?
Using the same random variables X and Y as above:

0.8 − 1.0
P (X < 0.8) = N1,0.252 (0.8) = N0,1 ( ) = N0,1 (−0.8) = 1 − N0,1 (0.8) = 0.2119.
0.25
0.8 − 1.1
P (Y < 0.8) = N1.1,0.352 (0.8) = N0,1 ( ) = N0,1 (0.86) = 1 − N0,1 (0.86) = 0.1949.
0.35

(c) What is the probability for a tree on the Able Farm to grow between 0.7m and 0.9m in a year?
what if the tree was on the Baker Farm?
Using the same random variables X and Y as above:

P (0.7 < X < 0.9) = N1,0.252 (0.9) − N1,0.252 (0.7) = N0,1 (−0.4) − N0,1 (−1.2) =
= 1 − N0,1 (0.4) − 1 + N0,1 (1.2) = N0,1 (1.2) − N0,1 (0.4) = 0.8849 − 0.6554 = 0.2295.
P (0.7 < Y < 0.9) = N1.1,0.352 (0.9) − N1.1,0.352 (0.7) = N0,1 (−0.57) − N0,1 (−1.14) =
= N0,1 (1.14) − N0,1 (0.57) = 0.8729 − 0.7157 = 0.1572.

(d) Assume, you’ve got two trees. One from Able and one from Baker. What can you say about the
difference D in their heights after one year? What is the distribution of D?
The difference between the heights of two trees after one year D can be written as:

D =X −Y

From the reproductive property of normal distributions (linear combinations of normally dis-
tributed r.v.’s are normally distributed) we know, that D, again, has a normal distribution;
D ∼ NµD ,σD 2 . We find the values for the parameters by looking at the parameters of X and
Y:
µD = E[D] = E[X − Y ] = E[X] − E[Y ] = 1 − 1.1 = −0.1
2
σD = V ar[D] = V ar[X + (−1) · Y ] = V ar[X] + (−1)2 V ar[Y ] = 0.252 + 0.352 = 0.185.
Therefore, D ∼ N (−0.1, 0.432 ).

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(e) On average, trees from the Baker farm will grow more than Able’s trees. But what is the exact
probability that a Baker tree has grown more than an Able tree in one year?
Using the difference in heights from the previous problem, the probability that a tree from the
Baker farm is higher than a tree from the Able farm is equal to the probability that D is less than
0:
0.1
P (D < 0) = N−0.1,0.432 (0) = N0,1 ( ) = N0,1 (0.23) = 0.5910.
0.43