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Chapter 5:

Continuous Probability Distributions

5.1 P(1.4 < X < 1.8) = F(1.8) – F(1.4) = (.5)(1.8) – (.5)(1.4) = 0.20

5.2 P(1.0 < X < 1.9) = F(1.9) – F(1.0) = (.5)(1.9) – (.5)(1.0) = 0.45

5.3 P(X < 1.4) = F(1.4) = (.5)(1.4) = 0.7

5.4 P(X > 1.3) = F(1.3) = (.5)(2.0) – (.5)(1.3) = 0.35

5.5 a.

Probability Density Function: f(x)


1.5
f(x)

1.0

0.5

0.0
0 1
X

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5-1
5-2 th
Statistics for Business & Economics, 8 edition

b.
Cumulative distribution function: F(x)

1.0
F(x)

0.8

0.6

0.4

0.2

0.0

0.0 0.2 0.4 0.6 0.8 1.0


C17

c. P(X < .25) = .25


d. P(X >.75) = 1-P(X < .75) = 1-.75 = .25
e. P(.2 < X < .8) = P(X <.8) – P(X <.2) = .8 - .2 = .6

5.6 a.

Probability density function: f(x)

0.75
f(x)

0.50

0.25

0.00
0 1 2 3 4

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Chapter 5: Continuous Probability Distributions 5-3

b.
Cumulative density function: F(x)

1.0

0.8

0.6
F(x)

0.4

0.2

0.0
0 1 2 3 4
X

c. P(X < 1) = .25


d. P(X < .5) + P(X > 3.5) = P(X < .5) + 1 – P(X < 3.5) = .25

5.7 a. P(60,000 < X < 72,000) = P(X < 72,000) – P(X < 60,000) = .6 - .5 = .1
b. P(X < 60,000) < P(X < 65,000) < P(X < 72,000); .5 < P(X < 65,000) < .6

5.8 a. P(380 < X < 460) = P(X < 460) – P(X < 380) = .6 - .4 = .2
b. P(X < 380) < P(X< 400) < P(X < 460); .4 < P(X < 400) < .6

5.9 W = a + bX. If TC = 1000 + 2X, where X = number of units produced, find the mean
and variance of the total cost if the mean and variance for the number of units produced
are 500 and 900 respectively. W  a  b x = 1000 + 2(500) = 2000.  2W  b 2 2 X =
(2)2(900) = 3600.

5.10 W = a + bX. If Profit = 1000 - 2X, where X = number of units produced, find the mean
and variance of the profit if the mean and variance for the number of units produced are
50 and 90 respectively. W  a  b x = 1000 - 2(50) = 900.  2W  b 2 2 X = (-2)2(90) =
360.

5.11 W = a + bX. If Profit = 2000 - 2X, where X = number of units produced, find the mean
and variance of the profit if the mean and variance for the number of units produced are
500 and 900 respectively. W  a  b x = 2000 - 2(500) = 1000.  2W  b 2 2 X = (-
2)2(900) = 3600.

5.12 W = a + bX. If Profit = 6000 - 3X, where X = number of units produced, find the
mean and variance of the profit if the mean and variance for the number of units produced
are 1000 and 900 respectively. W  a  b x = 6000 - 3(1000) = 3000.  2W  b 2 2 X = (-
3)2(900) = 8100

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5-4 th
Statistics for Business & Economics, 8 edition

5.13 Y = 10,000 + 1.5X = 10,000 + 1.5 (30,000) = $55,000


Y = |1.5| X = 1.5 (8,000) = $12,000

5.14 Y = 20 + X = 20 + 4 = $24 million


Bid = 1.1 Y =1.1(24) = $26.4 million,  = $1 million

5.15 Y = 60 + .2 X = 60 + 140 = $200


Y = |.2| X = .2 (130) = $26

5.16 Y = 6,000 + .08 X = 6,000 + 48,000 = $54,000


Y = |.08| X = .08(180,000) = $14,400

5.17 a. P(Z < 1.20) = .8849


b. P(Z > 1.33) = 1 – Fz(1.33) = 1 - .9082 = .0918
c. P(Z > -1.70) = 1 – Fz(-1.70) = 1 - .0446 = .9554
d. P(Z > -1.00) = Fz(1) = .8413
e. P(1.20 < Z < 1.33) = Fz(1.33) – Fz(1.20) = .9082 - .8849 = .0233
f. P(-1.70 < Z < 1.20) = Fz(1.20) – [1 - Fz(1.70)] = .8849 – .0446 = .8403
g. P(-1.70 < Z < -1.00) = Fz(1.70) – Fz(1.00) = .9554 - .8413 = .1141

5.18 a. Find Z0 such that P(Z < Z0) = .7, closest value of Z0 = .52
b. Find Z0 such that P(Z < Z0) = .25, closest value of Z0 = -.67
c. Find Z0 such that P(Z > Z0) = .2, closest value of Z0 = .84
d. Find Z0 such that P(Z > Z0) = .6, closest value of Z0 = -.25

5.19 X follows a normal distribution with µ = 50 and 2 = 64


60  50
a. Find P(X > 60). P(Z > ) = P(Z > 1.25) = .5 -
8
.3944 = .1056
35  50 62  50
b. Find P(35 < X < 62). P( <Z< ) = P(-1.88 < Z < 1.5) = .4699 + .4332
8 8
= .9031
55  50
c. Find P(X < 55). P(Z < ) = P(Z < .62) = .5 +
8
.2324 = .7324
X  50
d. Probability is .2 that X is greater than what number? Z = .84. .84  ; X=
8
56.72
e. Probability is .05 that X is in the symmetric interval about the mean between which
X  50
two numbers? Z = +/- .06. .06  . X = 49.52 and 50.48.
8

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Chapter 5: Continuous Probability Distributions 5-5

5.20 X follows a normal distribution with µ = 80 and 2 = 100


60  80
a. Find P(X > 60). P(Z > ) = P(Z > -2.00) = .5 + .4772 = .9772
10
72  80 82  80
b. Find P(72 < X < 82). P( <Z< ) = P(-.80 < Z < .20) = .2881 + .0793
10 10
= .3674
55  80
c. Find P(X < 55). P(Z < ) = P(Z < -2.50) = .5 - .4938 = .0062
10
X  80
d. Probability is .1 that X is greater than what number? Z = 1.28. 1.28  ; X=
10
92.8
e. Probability is .6826 that X is in the symmetric interval about the mean between which
X  80
two numbers? Z = +/- 1. 1  . X = 70 and90.
10

5.21 X follows a normal distribution with µ = .2 and 2 = .0025


.4  .2
a. Find P(X > .4). P(Z > ) = P(Z > 4.00) = .5 - .5 = .0000
.05
.15  .2 .28  .2
b. Find P(.15 < X < .28). P( <Z< ) = P(-1.00 < Z < 1.60) = .3431 +
.05 .05
.4452 = .7883
.10  .20
c. Find P(X < .10). P(Z < ) = P(Z < -2.00) = .5 - .4772 = .0228
.05
X  .20
d. Probability is .2 that X is greater than what number? Z = .84. .84  ; X=
.05
.242
e. Probability is .05 that X is in the symmetric interval about the mean between which
X  .2
two numbers? Z = +/- .06. .06  . X = .197 and .203.
.05

400  380
5.22 a. P(Z < ) = P(Z < .4) = .6554
50
360  380
b. P(Z > ) = P(Z > -.4) = FZ(.4) = .6554
50
c. The graph should show the property of symmetry – the area in the tails equidistant
from the mean will be equal.
300  380 400  380
d. P( <Z< ) = P(-1.6 < Z < .4) = FZ(.4) – [1-FZ(1.6)] = .6554 -
50 50
.0548 = .6006

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5-6 th
Statistics for Business & Economics, 8 edition

e. The area under the normal curve is equal to .8 for an infinite number of ranges –
merely start at a point that is marginally higher. The shortest range will be the one
that is centered on the Z of zero. The Z that corresponds to an area of .8 centered on
the mean is a Z of ±1.28. This yields an interval of the mean plus and minus $64:
[$316, $444]

1, 000  1, 200
5.23 a. P(Z > ) = P(Z > -2) =FZ(2) = .9772
100
1,100  1, 200 1,300  1, 200
b. P( <Z< ) = P(-1 < Z < 1) = 2FZ(1) –1 = .6826
100 100
c. P(Z > 1.28) = .1, plug into the Z-formula all of the known information and solve for
X  1, 200
the unknown: 1.28 = . Solve algebraically for X. Therefore, X = 1,328
100

38  35
5.24 a. P(Z > ) = P(Z > .75) = 1 - FZ(.75) = .2266
4
32  35
b. P(Z < ) = P(Z < -.75) = 1 - FZ(.75) = .2266
4
32  35 38  35
c. P( <Z< ) = P(-.75 < Z < .75) = 2FZ(.75) – 1 = 2(.7734) – 1 = .5468
4 4
d. (i) The graph should show the property of symmetry – the area in the tails equidistant
from the mean will be equal.
(ii) The answers to a, b, c sum to one because the events cover the entire area under
the normal curve which by definition, must sum to 1.

20  12.2
5.25 a. P(Z > ) = P(Z > 1.08) = 1 – Fz (1.08) = .1401
7.2
0  12.2
b. P(Z < ) = P(Z < -1.69) = 1 – Fz (1.69) = .0455
7.2
5  12.2 15  12.2
c. P( <Z< ) = P(-1 < Z < .39) = Fz (.39) – [1- Fz (1)] = .6517 - .1587
7.2 7.2
= .4930

10  12.2
5.26 a. P(Z < ) = P(Z < - .79) = 1 – Fz (.79) = .2148
2.8
15  12.2
b. P(Z > ) = P(Z > 1) = 1 – Fz (1) = .1587
2.8
12  12.2 15  12.2
c. P( <Z< ) = P(-.07 < Z < 1) = Fz (1) – [1- Fz (.07)] = .8413 - .4721
2.8 2.8
= .3692
d. The answer to a. will be larger because 10 grams is closer to the mean than is 15
grams. Thus, there would be a greater area remaining less than 10 grams than will be
the area above 15 grams.

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Chapter 5: Continuous Probability Distributions 5-7

460000  500000 540000  500000


5.27 a. P( <Z< ) = P(-.8 < Z < .8) = 2 Fz
50000 50000
(.8) – 1 = .5762
b. If P(Z < -.84) = .2, then plug into the Z formula and solve for the Xi: the value of
Xi  500
the cost of the contract. -.84 = . Xi = $458 (thousand dollars).
50
c. The shortest 95% range will be the interval centered on the mean. Since the P(Z >
Xi  500
1.96) = .025, 1.96 = . Xi = $598 (thousand dollars). The lower value of
50
Xi  500
the interval will be –1.96 = which is Xi = $402 (thousand dollars).
50
Therefore, the shortest range will be 598 – 402 = $196 (thousand dollars).

5.28 P(Z > 1.5) = 1 - Fz(1.5) = .0668

Xi  18.2
5.29 P(Z < -1.28) = .1, –1.28 = Xi = 16.28
1.5

5.30 P(Z > .67) = .25, .67 = 17.8 - 


P(Z > 1.04) = .15, 1.04 = 19.2 - 
Solving for , :  = 15.265, 2 = (3.7838)2 = 14.317

820  700
5.31 a. P(Z > ) = P(Z> 1) = 1 – Fz (1) = .1587
120
730  700 820  700
b. P( <Z< ) = P(.25 < Z < 1) = .8413 - .5987 = .2426
120 120
Xi  700
c. P(Z < -1.645) = .05, –1.645 = , Xi = 502.6
120

5.32 For Investment A, the probability of a return higher than 10%:


10  10.4
P(Z > ) = P(Z > -.33) = FZ(.33) = .6293
1.2
For Investment B, the probability of a return higher than 10%
10  11.0
P(Z > ) = P(Z > -.25) = FZ(.25) = .5987
4
Therefore, Investment A is a better choice

Copyright © 2013 Pearson Education


5-8 th
Statistics for Business & Economics, 8 edition

5  4.4
5.33 For Supplier A: P(Z < ) = P(Z < 1.5) = .9332
.4
5  4.2
For Supplier B: P(Z < ) = P(Z < 1.33) = .9082
.6
Therefore, Supplier A has a greater probability of achieving less than 5% impurity and is
hence the better choice

Xi  150
5.34 a. P(Z > -1.28) = .9, -1.28 = , Xi = 98.8
40
Xi  150
b. P(Z < .84) = .8, .84 = , Xi = 183.6
40
120  150 2
c. P(X  1) = 1 – P(X = 0) = 1-[P(Z< )] = 1 – [P(Z < -.75)]2 = 1 – (.2266)2 =
40
.9487

60  75
5.35 a. P(Z < ) = P(Z < -.75) = .2266
20
90  75
b. P(Z > ) = P(Z >.75) = .2266
20
c. The graph should show that 60 minutes and 90 minutes are equidistant from the mean
of 75 minutes. Therefore, the areas above 90 minutes and below 60 minutes by the
property of symmetry must be equal.
Xi  75
d. P(Z > 1.28) = .1, 1.28 = , Xi = 100.6
20

400  420 480  420


5.36 a. P( <Z< ) = P(-.25 < Z < .75) = Fz (.75) – [1 – FZ (.25)]
80 80
= .7734 - .4013 =.3721
Xi  420
b. P(Z > 1.28) = .1, 1.28 = , Xi = 522.4
80
c. 400 – 439
d. 520 – 559
500  420 2
e. P(X 1) = 1 –P(X = 0 ) = 1 – [P(Z< )] = 1 – (.8413)2 = .2922
80

180  200
5.37 a. P( < Z < 0) = .5 – [1- Fz (1)] = .5 -.1587 = .3413
20
245  200
b. P(Z > ) = 1 – FZ(2.25) = .0122
20
c. Smaller
Xi  200
d. P(Z < -1.28) = .1, -1.28 = , Xi = 174.4
20

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-9

5.38

z=(16-15)/2=1/2=0.5
z=(14-15)/2=-0.5
Z table --> 0.5=0.1915
0.1915+0.1915=0.383
= 38%

5.39 n = 900 from a binomial probability distribution with P = .50


a. Find P(X > 500). E[X] =  = 900(.5) = 450,  = (900)(.5)(.5) = 15 P(Z >
500  450
) = P(Z > 3.33) = 1 – FZ(3.33) = .0004
15
430  450
b. Find P(X < 430). P(Z < ) = P(Z < -1.33) = 1 - FZ(1.33) = .0918
15
440  450 480  450
c. P( <Z< ) = P(-.67 < Z < 2.00) = Fz (-.67) + FZ(2.00) = .2486 +
15 15
.4772 = .7258
d. Probability is .1 that the number of successes is less than how many? Z = -1.28.
X  450
1.28  X = 430.8
15
e. Probability is .08 the number of successes is greater than? Z = 1.41.
X  450
1.41  . X = 471.15.
15

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5-10 th
Statistics for Business & Economics, 8 edition

5.40 n = 1600 from a binomial probability distribution with P = .40


a. Find P(X > 1650). E[X] =  = 1600(.4) = 640,  =
1650  640
(1600)(.4)(.6) = 19.5959 P(Z > ) = P(Z
19.5959
> 51.5414) = 1 – FZ(51.5414) = 0
1530  640
b. Find P(X < 1530). P(Z < )=
19.5959
P(Z<45.4177) = 1
1550  640 1650  640
c. P( <Z< )= P(46.4383< Z <
19.5959 19.5959
51.5414) = =1-1=0
d. Probability is .09 that the number of successes is less than how
X  640
many? Z = -1.34. 1.34  X = 613.74614
19.5959
successes
e. Probability is .20 the number of successes is greater than?
X  640
Z = .84. .84  . X = 656.46656successes
19.5959

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-11

5.41 n = 900 from a binomial probability distribution with P = .10


a. Find P(X > 110). E[X] =  = 900(.1) = 90,  =
110  90
(900)(.1)(.9) = 9 P(Z > ) = P(Z >
9
2.22) = 1 – FZ(2.22) = .0132
53  90
b. Find P(X < 53). P(Z < ) = P(Z < -4.11) = 1 -
9
FZ(4.11) = .0000
55  90 120  90
c. P( <Z< ) = P(-3.89 < Z < 3.33) =
9 9
1.0000
d. Probability is .10 that the number of successes is less
X  90
than how many? Z = -1.28. 1.28  X=
9
78.48
e. Probability is .08 that the number of successes is
X  90
greater than how many? Z = 1.41. 1.41  . X
9
= 102.69

5.42 n = 1600 from a binomial probability distribution with P = .40


a. Find P(P > .45). E[P] =  = P = .40,  =
P (1  P) .4(1  .4) .45  .40
 = .01225 P(Z > )=
n 1600 .01225
P(Z > 4.082) = 1 – FZ(4.082) = .0000
.35  .40
b. Find P(P < .35). P(Z < ) = P(Z < -4.08) = 1 -
.01225
FZ(4.08) = .0000
.44  .40 .37  .40
c. P( <Z< ) = P(3.27 < Z < -2.45) =
.01225 .01225
1 – [(2)[1-Fz (3.27)]] = 1 - (2)[1-.9995] = .9995 -
.0071 = .9924
d. Probability is .20 that the percentage of successes is
X  .40
less than what percent? Z = -.84. .84  P=
.01225
38.971%
e. Probability is .09 the percentage of successes is
X  .40
greater than? Z = 1.34. 1.34  . P = 41.642%
.01225

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5-12 th
Statistics for Business & Economics, 8 edition

5.43 n = 400 from a binomial probability distribution with P = .20


a. Find P(P > .25). E[P] =  = P = .20,  =
P (1  P) .2(1  .2) .25  .20
 = .02 P(Z > )=
n 400 .02
P(Z > 2.50) = 1 – FZ(2.50) = 1 - .99 38 = .0062
.15  .20
b. Find P(P < .15). P(Z < ) = P(Z < -2.50) = 1 -
.02
FZ(2.50) = .0062
.17  .20 .24  .20
c. P( <Z< ) = P(-1.50 < Z < 2.00) =
.02 .02
[Fz (1.50) - .5] + [Fz (2.00) - .5] = .4332 + .4772 =
.9104
d. Probability is .15 that the percentage of successes is
X  .20
less than what percent? Z = -1.04. 1.04 
.02
P = 17.92%
e. Probability is .11 the percentage of successes is
X  .20
greater than? Z = 1.23. 1.23  . P = 22.46%
.02

5.44 a. E[X] =  = 900(.2) = 180,  = (900)(.2)(.8) = 12


200  180
P(Z > ) = P(Z > 1.67) = 1 – FZ(1.67) = .0475
12
175  180
b. P(Z < ) = P(Z < -.42) = 1 - FZ(.42) = .3372
12

5.45 a. E[X] =  = 400(.1) = 40,  = (400)(.1)(.9) = 6


35  40
P(Z > ) = P(Z > -.83) = FZ(.83) = .7967
6
40  40 50  40
b. P( <Z< ) = P(0 < Z < 1.67) = Fz (1.67) – FZ(0) = .9525 - .5 = .4525
6 6
34  40 48  40
c. P( <Z< ) = P(-1 < Z < 1.33) = Fz (1.33) – [1 – FZ(1)] = .9082 -
6 6
.1587 = .7495
d. 40 - 41

5.46 E[X] = (100)(.6) = 60,  = (100)(.6)(.4) = 4.899

50  60
P(Z < ) = P(Z < -2.04) = 1 – FZ(2.04) = 1- .9793 = .0207
4.899

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-13

5.47 a. E[X] = (450)(.25) = 112.5,  = (450)(.25)(.75) = 9.1856


100  112.5
P(Z < ) = P(Z < -1.36) = 1 - FZ(1.36) = 1 - .9131 = .0869
9.1856
120  112.5 150  112.5
b. P( <Z< ) = P(.82 < Z < 4.08) = Fz(4.08) - Fz(.82) = 1.000 -
9.1856 9.1856
.7939 = .2061

38  35
5.48 P(Z > ) = P(Z > .75) = 1 - FZ(.75) = 1 - .7734 = .2266
4
E[X] = 100(.2266) = 22.66,  = (100)(.2266)(.7734) = 4.1863
25  22.66
P(Z > ) = P(Z > .56) = 1 - FZ(.56) = 1 - .7123 = .2877
4.1863

10  12.2
5.49 P(Z ≤ ) = P(Z < -.79) = 1 - FZ(.79) = 1 - .7852 = .2148
2.8
E[X] = 400(.2148) = 85.92,  = (400)(.2148)(.7852) = 8.2137
100  85.92
P(Z > ) = P(Z > 1.71) = 1 - FZ(1.71) = 1 - .9564 = .0436
8.2137

5.50  = 1.0, what is the probability that an arrival occurs in the first t=2 time units?
Cumulative Distribution Function
Exponential with mean = 1
x P( X <= x )
0 0.000000
1 0.632121
2 0.864665
3 0.950213
4 0.981684
5 0.993262
P(T < 2) = .864665

5.51  = 8.0, what is the probability that an arrival occurs in the first t=7 time units?
Cumulative Distribution Function
Exponential with mean = 8
x P( X <= x )
0 0.000000
1 0.117503
2 0.221199
3 0.312711
4 0.393469
5 0.464739
6 0.527633
7 0.583138
8 0.632121
P(T < 7) = .583138

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5-14 th
Statistics for Business & Economics, 8 edition

5.52  = 5.0, what is the probability that an arrival occurs after t=7 time units?
Cumulative Distribution Function
Exponential with mean = 5
x P( X <= x )
0 0.000000
1 0.181269
2 0.329680
3 0.451188
4 0.550671
5 0.632121
6 0.698806
7 0.753403
8 0.798103
P(T>7) = 1-[P(T ≤7)] = 1 - .7534 =.2466

5.53  = 5.0, what is the probability that an arrival occurs after t = 5 time units?
Cumulative Distribution Function
Exponential with mean = 5

x P( X <= x )
0 0.000000
1 0.181269
2 0.329680
3 0.451188
4 0.550671
5 0.632121
6 0.698806
7 0.753403
8 0.798103
P(T>5) = 1-[P(T≤5)] = 1 - .6321 = .3679

5.54  = 3.0, what is the probability that an arrival occurs after t=2 time units?
Cumulative Distribution Function
Exponential with mean = 3
x P( X <= x )
0 0.000000
1 0.283469
2 0.486583
3 0.632121
P(T<2) = .4866

5.55 a. P(X < 20) = 1 - e  (20 /10) = .8647


b. P(X > 5) = 1 – [1 - e  (5/10) ] = e  (5/10) = .6065
c. P(10 < X < 15) = (1- e  (15/10) ) - (1 - e  (10 /10) ) = e 1 - e 1.5 = .1447

5.56 P(X > 18) = e  (18 /15) = .3012

5.57 P(X > 2) = e  (2)(.8) = .2019

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-15

5.58 a. P(X > 3) = 1 – [1 - e  (3/  ) ] = e 3 since  = 1 / 


b. P(X > 6) = 1 – [1 - e  (6 /  ) ] = e  (6 /  ) = e 6 
c. P(X>6|X>3) = P(X > 6)/P(X > 3) = e 6  / e3 ] = e 3
The probability of an occurrence within a specified time in the future is not related to
how much time has passed since the most recent occurrence.

5.59
a. The mean and standard deviation are the same, and equal 1/ 
Therefore = 1/.05 = 20 (hours)
b. P( X > 20) =
= .3679

5.60 Let   20 trucks / 60 minutes  1 truck / 3 minutes.


a. P (t  5)  1  P (t  5)  1  [1  e  (1/ 3)(5) ]  0.1889
b. P (t  1)  1  e  (1/ 3)( 2 )  0.4866
c. P (4  t  10)  [1  e  (1/ 3)(10 ) ]  [1  e  (1/ 3)( 4 ) ]  0.2279

5.61 Find the mean and variance of the random variable: W = 5X + 4Y with correlation = .5
W  a x  b y = 5(100) + 4(200) = 1300
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 52(100) + 42(400) + 2(5)(4)(.5)(10)(20) = 12,900

5.62 Find the mean and variance of the random variable: W = 5X + 4Y with correlation = -.5
W  a x  b y = 5(100) + 4(200) = 1300
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 52(100) + 42(400) + 2(5)(4)(-.5)(10)(20) = 4,900

5.63 Find the mean and variance of the random variable: W = 5X – 4Y with correlation = .5.
W  a x  b y = 5(100) – 4(200) = -300
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 52(100) + 42(400) – 2(5)(4)(.5)(10)(20) = 4900

5.64 Find the mean and variance of the random variable: W = 5X – 4Y with correlation = .5.
W  a x  b y = 5(500) – 4(200) = 1700
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 52(100) + 42(400) – 2(5)(4)(.5)(10)(20) = 4900

Copyright © 2013 Pearson Education


5-16 th
Statistics for Business & Economics, 8 edition

5.65 Find the mean and variance of the random variable: W = 5X – 4Y with correlation of -.5.
W  a x  b y = 5(100) – 4(200) = -300
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 52(500) + 42(400) – 2(5)(4)(-.5)(22.3607)(20) = 27,844.28

5.66  Z = 100,000(.1) + 100,000(.18).  Z = 10,000 + 18,000 = 28,000


Z = 0. Note that the first investment yields a certain profit of 10% which
is a zero standard deviation. x = 100,000(.06) = 6,000

5.67 Assume that costs are independent across years


 Z = 5  x = 5(200) = 1,000
5 x =
2
Z = 5(3, 600) = 134.16

5.68  Z = 1   2  3 = 50,000 + 72,000 + 40,000 = 162,000


Z =  12   2 2   32 = (10, 000) 2  (12, 000) 2  (9, 000) 2 = 18,027.76

5.69  Z = 1   2  3 = 20,000 + 25,000 + 15,000 = 60,000


Z =  12   2 2   32 = (2, 000) 2  (5, 000) 2  (4, 000) 2 = 6,708.2

5.70 The calculation of the mean is correct, but the standard deviations of two random
variables cannot be summed. To get the correct standard deviation, add the variances together
and then take the square root. The standard deviation:  z  5(15) 2 = 33.5410.

5.71  Z = (16  x ) / 16 =  x = 28
Z = 16 x / 16 =
2
(2.4) 2 / 16 = 2.4 / 4 = .6

5.72 a. Compute the mean and variance of the portfolio with correlation of +.5
W  a x  b y = 50(25) + 40(40) = 2850
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 502(121) + 402(225) + 2(50)(40)(.5)(11)(15) = 992,500
b. Recompute with correlation of -.5
W  a x  b y = 50(25) + 40(40) = 2850
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 502(121) + 402(225) + 2(50)(40)(-.5)(11)(15) = 332,500

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-17

5.73 a. Find the probability that total revenue is greater than total cost
W = aX – bY = 10X –[7Y+250)]
W  a x  b y = 10(100) – [7(100) + 250] = 50
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 102(64) + 72(625) – 2(10)(7)(.6)(8)(25) = 20,225  W  20, 225
= 142.2146

0  50
P(Z > ) = P(Z > -.35) = FZ(.35) = .6368
142.2146

b. 95% acceptance interval = 50 ± 1.96 (142.2146) = 50 ± 278.7406 = -228.7406 to


328.7406

5.74 a. W = aX – bY = 10X – 10Y


W  a x  b y = 10(100) – 10(90) = 100
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
=102(100) + 102(400) – 2(10)(10)(-.4)(10)(20) =66,000  W  66, 000 =256.90465

0  100
b. P(Z < ) = P(Z < -.39) = 1 – FZ(.39) = 1 – .6517 = .3483
256.90465

5.75
W = aX – bY = 10X – 4Y
W  a x  b y = 10(400) – 4(400) = 2400
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
=102(900) + 42(1600) – 2(10)(4)(.5)(30)(40) = 67,600  W  67, 600 =260

2000  2400
P(Z > ) = P(Z > -1.54) = FZ(1.54) = .9382
260

5.76 a. W = aX – bY = 1X – 1Y
W  a x  b y = 1(100) – 1(105) = -5
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
=12(900) + 12(625) – 2(1)(1)(.7)(30)(25) = 475  W  475 =21.79449

0  (5)
b. P(Z > ) = P(Z > .23) = 1 – FZ(.23) = 1 – .5910 = .4090
21.79449

Copyright © 2013 Pearson Education


5-18 th
Statistics for Business & Economics, 8 edition

5.77 a. P(X < 10) = (10/12) – (8/12) = 1/6


b. P(X > 12) = (20/12) – (12/12) = 8/12 = 2/3
c. E[] = (20/12 – 12/12) = 2(2/3) = 1.333
d. To jointly maximize the probability of getting the contract and the profit from that
contract, maximize the following function: max E[] = (B – 10)(20/12 – B/12).
Where B is the value of the bid. To determine the value for B that maximizes the
expected profit, an iterative approach can be used. The value of B is 15.

5.78 a.

Probability Density Function: f(x)

f(x)

0.033333

0.000000
30 35 40 45 50 55 60 65 70

b. Cumulative density function


Cumulative density function: F(x)

1.0

0.8

0.6
F(x)

0.4

0.2

0.0
35 40 45 50 55 60 65
X

c. P(40 < X < 50) = (50/30) – (40/30) = 10/30

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-19

65  35
d. E[X] = = 50
2

5.79 a. The probability density function f(x):

Probability density function: f(x)


1.50

f(x)

1.00

0.5

0.00
0 .5 1 1.5 3

b. Fx(x)  0 for all x. The area under Fx (x) = 2[½(base x height)] = 1


.52 .52
c. P(.5 < X < 1.5 ) = (.5 - ) + (.5 - ) = .375 + .375 = .75
2 2

5.80 a.  Y = 2000(0.1) + 1000(1+  x ) = 200 + 1,160 = 1,360


b. Y = |1000|  Y = 1000(.08) = 80

5.81 a.  R = 1.45  x = 1.45(530) = 768.5


b. R = |1.45| x = 1.45(69) = 100.05
c.  = R – C = 1.45X-0.95X-100 = .5X – 100, E[] = .5  x -100 = 165,  = |.5| x = .5(69) =
34.5

5.82 Given that the variance of both predicted earnings and forecast error are both positive and
given that the variance of actual earnings is equal to the sum of the variances of predicted
earnings and forecast error, then the variance of predicted earnings must be less than the
variance of actual earnings

5.83 Cov[(X1 + X2), (X1 – X2)] = E[(X1 + X2)(X1 – X2)] – E[X1 + X2] E[X1 – X2] = E[X12 -
X22]– E[(X1) + E(X2)][E(X1) – E(X2)] =
E(X12) – E(X22) - [(E(X1))2 – (E(X2))2] = Var (X1) – Var (X2)
Which is 0 if and only if Var (X1) = Var (X2)

Copyright © 2013 Pearson Education


5-20 th
Statistics for Business & Economics, 8 edition

3  2.6
5.84 a. P(Z > ) = P(Z > .8) = 1 – FZ(.8) = .2119
.5
2.25  2.6 2.75  2.6
b. P( <Z< ) = P(-.7 < Z < .3) = Fz (.3) – [1-FZ(.3)] = .3759
.5 .5
Xi  2.6
c. P(Z > 1.28) = .1, 1.28 = , Xi = 3.24
.5
d. P(Xi > 3) = .2119 (from part a)
E[X] = 400(.2119) = 84.76, x = (400)(.2119)(.7881) = 8.173
80  84.76
P(Z > ) = P(Z > -.58) = FZ(.58) = .7190
8.173
e. P(X  1) = 1 – P(X = 0) = 1 – (.7881)2 = .3789

65  60
5.85 a. P(Z > ) = P(Z > .5) = 1 – FZ(.5) = .3085
10
50  60 70  60
b. P( <Z< ) = P(-1 < Z < 1) = 2 Fz (1) – 1 = .6826
10 10
Xi  60
c. P(Z > 1.96) = .025, 1.96 = , Xi = 79.6
10
d. P(Z > .675) = .25, .675 = The shortest range will be the interval centered on the
Xi  60
mean. Since the P(Z > .675) = . 25, .675 = . Xi = 66.75. The lower value of
10
Xi  60
the interval will be –.675 = which is Xi = 53.25. Therefore, the shortest
10
range will be 66.75 – 53.25 = 13.5. This is by definition the InterQuartile Range
(IQR).
e.
P(X > 65) = .3085 (from part a)
Use the binomial formula: P(X = 2) = C24 (.3085) 2 (.6915) 2 = 0.2731

85  100
5.86 a. P(Z < ) = P(Z < -.5) = .3085
30
70  100 130  100
b. P( <Z< ) = P(-1 < Z < 1) = 2 Fz (1) – 1 = .6826
30 30
Xi  100
c. P(Z > 1.645) = .05, 1.645 = , Xi = 149.35
30
60  100
d. P(Z > ) = P(Z > -1.33) = FZ(1.33) = .9032
30
P(X  1) = 1 – P(X = 0) = 1 – (.0918)2 = .9916
e. Use the binomial formula: P(X = 2) = C24 (.9082) 2 (.0918) 2 = 0.0417
f. 90 – 109

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-21

g. 130 - 149

15  20 25  20
5.87 a. P( <Z< ) = P(-1.25 < Z < 1.25) = 2 FZ(1.25) – 1 =
4 4
.7888
30  20
b. P(Z > ) = P(Z > 2.5) =1 - Fz (2.5) = .0062
4
c. P(X  1) = 1 – P(X = 0) = 1 – [FZ(2.5)]5 = .0306
Xi  20
d. P(Z > .525) = .4 .253 = , Xi = 21.01. The shortest range will be the interval
4
Xi  20
centered on the mean. The lower value of the interval will be –.525 =
4
which is Xi = 18.99. Therefore, the shortest range is 21.01 – 18.99 = 2.03.
f. 19 – 21
g. 21 – 23

130  100
5.88 P(Z > 1.28) = .1, 1.28 = ,  = 23.4375

140  100
P(Z > ) = P(Z > 1.71) = 1 – FZ(1.71) = .0436
23.4375
4.36% of members spend more than $140 in a year.
25  
5.89 P(Z > 1.28) = .1, 1.28 = ,  = 21.8
2.5
20  21.8
P(Z < ) = P(Z < -.72) = 1 – FZ(.72) = .2358
2.5
23.58% of customers spent less than $20.

5.90 E[X] = 1000(.4) = 400, x = (1000)(.4)(.6) = 15.4919


500  400
P(Z < ) = P(Z < 6.45)  1.0000
15.4919

5.91 E[X] = 400(.6) = 240, x = (400)(.6)(.4) = 9.798


200  240
P(Z > ) = P(Z > -4.08)  1.0000
9.798

Copyright © 2013 Pearson Education


5-22 th
Statistics for Business & Economics, 8 edition

5.92 The number of calls per 12-hour time period follows a Poisson distribution with
  15 calls / 12 - hour time period.

Cumulative Distribution Function

Poisson with mu = 15.0000

x P( X <= x)
0.00 0.0000
1.00 0.0000
2.00 0.0000
3.00 0.0002
4.00 0.0009
5.00 0.0028
6.00 0.0076
7.00 0.0180
8.00 0.0374
9.00 0.0699
10.00 0.1185
11.00 0.1848
12.00 0.2676
13.00 0.3632
14.00 0.4657
15.00 0.5681
16.00 0.6641
17.00 0.7489

P( x  10)  P( x  9)  0.0699
P( x  17)  1  P( x  17)  1  0.7489  0.2511

e 6 6 6
5.93 a. P(X = 6) = = .1606
6!
6

b. 20 minutes = 1/3 hours, P(X > 1/3) = e 3
= .1353
6

c. 5 minutes = 1/12 hour, P(X < 1/12) = 1 - e 12 = .3935
d. 30 minutes = .5 hour, P(X > .5) = e  (.5)(6) = .0498

5.94
z=(4.4-3.2)/0.8=1.5
Z table 1.5=0.4332
0.5-0.4332=0.0668
= 0.6%

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-23

5.95

a. z=(285.4-283)/1.6
=2.4/1.6=1.5
1.5=0.4332
= 43%

b. z=(285.4-283)/2.2
=2.4/2.2=1.5
1.09=0.3621
=36%

3.5  2.4
5.96 P(Z>1.28)=.1, 1.28= , =.8594. Probability that 1 executive spends 3+ hours on

3  2.4
task: P(Z > ) = P(Z > .7) = 1 – FZ(.7) = 0.3 E[X] = 400(0.3)=120 , x =
.8594
80  120
(400)(.3)(.7) = 9.165; P(Z > ) = P(Z>-4.36 )= FZ (4.36) = 1
9.165

5.97 Portfolio consists of 10 shares of stock A and 8 shares of stock B.


a. Find the mean and variance of the portfolio value: W = 10X + 8Y with correlation of .3.
W  a x  b y = 10(10) + 8(12) = 196
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 102(16) + 82(9) + 2(10)(8)(.3)(4)(3) = 2,752
b. Option 1: Stock 1 with mean of 10, variance of 25, correlation of -.2.
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 102(25) + 82(9) + 2(10)(8)(-.2)(5)(3) = 2,596
Option 2: Stock 2 with mean of 10, variance of 9, correlation of 0.5
= 102(9) + 82(9) + 2(10)(8)(0.5)(5)(3) = 2196
To reduce the variance of the portfolio, select Option 2

5.98 Portfolio consists of 10 shares of stock A and 8 shares of stock B


a. Find the mean and variance of the portfolio value: W = 10X + 8Y with correlation of .3.
W  a x  b y = 10(12) + 8(10) = 200
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 102(14) + 82(12) + 2(10)(8)(.5)(3.74166)(3.4641) = 3,204.919
b. Option 1: Stock 1 with mean of 12, variance of 25, correlation of -.2.
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 102(25) + 82(12) + 2(10)(8)(-.2)(5)(3.4641) =2713.744
Option 2: Stock 2 with mean of 10, variance of 9, correlation of .6.
= 102(9) + 82(12) + 2(10)(8)(0.5 )(3)(3.4641) = 2499.384
To reduce the variance of the portfolio, select Option 2

Copyright © 2013 Pearson Education


5-24 th
Statistics for Business & Economics, 8 edition

5.99
W  a x  b y = 1(80000) + 1(60000) = 140000
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 12(1000000) + 12(810000) + 2(1)(1)(.4)(1000)(900) = 2,530,000
 W  2,530, 000  1590.597372
Probability that the weight is between 138,000 and 141,000:
138, 000  140, 000 141, 000  140, 000
= –1.26 Fz = .3962, = .63 Fz = .2357
1590.597372 1590.597372
.3962 + .2357 = .6319

5.100
a. Mean: .211; Standard deviation: .1081
c. Mean: .211; Standard deviation: .1064

5.101: Results are obtained using Minitab.


Mean and variance for stock prices:
Alcoa Inc. Reliant Energy, Inc. Sea Containers Ltd.
Mean 31.98286 13.07000 10.55286
Variance 27.41879 54.08367 60.97572

Covariances:
Alcoa Inc. Reliant Energy, Inc.
Reliant Energy, Inc. 22.1591
Sea Containers Ltd. 5.6791 -27.7501

Let the total value of the portfolio be represented by variable W.

W = (0.3333)(31.98286) + (0.3333)(13.07000) + (0.3333)(10.55286) = 18.54

 W2 = (0.33332)(27.41879) + (0.33332)(54.08367) + (0.33332)(60.97572) +


2[(0.3333)(0.3333)(22.1591) + (0.3333)(0.3333)(5.679) +
(0.3333)(0.3333)(-27.7501)] = 15.85

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-25

We can confirm these results by finding the portfolio price for each year, shown next, and then
by finding the mean and variance of these prices.

Portfolio Price
20.9567
14.9733
17.4767
21.5867
21.2033
11.6367
21.9133

Descriptive Statistics: Portfolio Price

Variable N N* Mean SE Mean StDev Variance Minimum Q1 Median


Portfolio Price 7 0 18.54 1.50 3.98 15.85 11.64 14.97 20.96

Variable Q3 Maximum
Portfolio Price 21.59 21.91

The previous output confirms that W = 18.54 and  W2 = 15.85.

Assuming that the portfolio price is normally distributed, the narrowest interval that contains
95% of the distribution of portfolio value is centered at the mean. Therefore, it is W  z / 2 W .
Using z / 2  1.96 and  W  3.98, the interval is 18.54  (1.96)(3.98) or (10.74, 26.34).

5.102 : Results are obtained using Minitab.


Mean and variance for stock prices:
TCF Financial
AB Volvo (ADR) Alcoa Inc. Pentair Inc. Corporation
Mean 8.6143 31.9829 28.9543 25.1643
Variance 25.4171 27.4188 95.4157 20.4361

Covariances:
AB Volvo (ADR) Alcoa Inc. Pentair Inc.
Alcoa Inc. 6.5180
Pentair Inc. 31.2128 5.4712
TCF Financial
Corporation -4.3594 -2.7947 20.6897

Copyright © 2013 Pearson Education


5-26 th
Statistics for Business & Economics, 8 edition

Let the total value of the portfolio be represented by variable W.

W = (0.3333)(8.6143) + (0.1667)(31.9829) + (0.3333)(28.9543) + (0.1667)(25.1643) = 22.05

 W2 = (0.33332)(25.4171) + (0.16672)(27.4188) + (0.33332)(95.4157) + (0.16672)(20.4361) +


2[(0.3333)(0.1667)(6.5180) + (0.3333)(0.3333)(31.2128) + (0.3333)(0.1667)(-4.3594) +
(0.1667)(0.3333)(5.4712) +
(0.1667)(0.1667)(-2.7947) + (0.3333)(0.1667)(20.6897)] = 24.68

We can confirm these results by finding the portfolio price for each year, shown next, and then
by finding the mean and variance of these prices.

Portfolio Price
26.1833
24.6217
24.0983
27.7533
20.2700
14.3017
17.1033

Descriptive Statistics: Portfolio Price

Variable N N* Mean SE Mean StDev Variance Minimum Q1 Median


Portfolio Price 7 0 22.05 1.88 4.97 24.68 14.30 17.10 24.10

Variable Q3 Maximum
Portfolio Price 26.18 27.75

The previous output confirms that W = 22.05 and  W2 = 24.68.

Assuming that the portfolio price is normally distributed, the narrowest interval that contains
95% of the distribution of portfolio value is centered at the mean. Therefore, it is W  z / 2 W .
Using z / 2  1.96 and  W  4.97, the interval is 22.05  (1.96)(4.97) or (12.31, 31.79).

5.103: Results are obtained using Minitab.


Mean and variance for stock prices:
General Sea
3M Alcoa Intel Potlatch Motors Containers
Company Inc. Corporation Corporation Corporation Ltd.
Mean 75.373 31.983 24.904 39.684 36.279 10.553
Variance 113.671 27.419 34.680 111.229 150.734 60.976

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-27

Covariances:
3M Alcoa Intel Potlatch General Motors
Company Inc. Corporation Corporation Corporation
Alcoa Inc. 25.5503
Intel Corporation 14.0721 28.3612
Potlatch Corporation 81.3497 9.8462 2.9658
General Motors
Corporation -28.2769 23.1876 32.7968 -74.5682
Sea Containers Ltd. -1.2885 5.6791 17.3941 -2.1902 57.4105

Let the total value of the portfolio be represented by variable W. The mean and variance for this
portfolio, W and  W2 , can be found using the following equations or by using technology.

k k k 1 k
W   ai i ,  W2   ai2 i2  2 a a i j Cov( X i , X j )
i 1 i 1 i 1 j  i 1

Descriptive Statistics: Portfolio Price

Variable N N* Mean SE Mean StDev Variance Minimum Q1 Median


Portfolio Price 7 0 36.46 1.87 4.95 24.54 28.28 33.91 36.16

Variable Q3 Maximum
Portfolio Price 41.20 43.58

As previously shown, W = 36.46 and  W2 = 24.54.

Assuming that the portfolio price is normally distributed, the narrowest interval that contains
95% of the distribution of portfolio value is centered at the mean. Therefore, it is W  z / 2 W .
Using z / 2  1.96 and  W  4.95, the interval is 36.46  (1.96)(4.95) or (26.76, 46.16).

5.104: Results are obtained using Minitab.


Mean and variance for stock price growth:
3M Alcoa Intel Potlatch General Motors Sea Containers
Company Inc. Corporation Corporation Corporation Ltd.
Mean 0.001992 0.004389 -0.000082 0.007449 -0.014355 -0.146323
Variance 0.002704 0.005060 0.006727 0.006674 0.014518 0.176663

Copyright © 2013 Pearson Education


5-28 th
Statistics for Business & Economics, 8 edition

Covariances:
General
3M Intel Potlatch Motors
Company Alcoa Inc. Corporation Corporation Corporation
Alcoa Inc. 0.00153782
Intel Corporation 0.00163165 0.00184360
Potlatch Corporation 0.00012217 0.00197600 0.00144736
General Motors
Corporation -0.00005101 0.00103371 -0.00006588 0.00246545
Sea Containers Ltd. 0.00075015 0.00706908 -0.00131221 -0.00151704 0.01077420

Let the portfolio growth be represented by variable W. The mean and variance for this portfolio, W
and  W2 , can be found using the following equations or by using technology.

k k k 1 k
W   ai i ,  W2   ai2 i2  2 a a i j Cov( X i , X j )
i 1 i 1 i 1 j  i 1

Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum Q1


Portfolio Growth 60 0 -0.0245 0.0111 0.0862 0.0074 -0.4182 -0.0688

Variable Median Q3 Maximum


Portfolio Growth -0.0062 0.0303 0.1212

As previously shown, W = -0.0245 and  W2 = 0.0074.

5.105 : Results are obtained using Minitab.


Mean and variance for stock price growth:
General Motors International Potlatch Sea Containers Tata
Corporation Business Machines Corporation Ltd. Communications
Mean -0.014355 0.004589 0.007449 -0.146323 0.022260
Variance 0.014518 0.002607 0.006674 0.176663 0.021645

Covariances:
General Motors International Potlatch Sea Containers
Corporation Business Machines Corporation Ltd.
General Motors
Corporation
International Business
Machines 0.00061410
Potlatch Corporation 0.00246545 0.00097139
Sea Containers Ltd. 0.01077420 0.00256087 -0.00151704
Tata Communications 0.00108433 0.00149232 0.00626864 -0.00332721

Copyright © 2013 Pearson Education


Chapter 5: Continuous Probability Distributions 5-29

Let the portfolio growth be represented by variable W. The mean and variance for this portfolio, W
and  W2 , can be found using the following equations or by using technology.

k k k 1 k
W   ai i ,  W2   ai2 i2  2 a a i j Cov( X i , X j )
i 1 i 1 i 1 j  i 1

Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum Q1


Portfolio Growth 60 0 -0.0253 0.0133 0.1029 0.0106 -0.4573 -0.0763

Variable Median Q3 Maximum


Portfolio Growth -0.0048 0.0461 0.1378

As previously shown, W = -0.0253 and  W2 = 0.0106.

For the second portfolio (40% General Motors, 30% International Business Machines, and 30%
Tata Communications), we get the following output:
Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum


Portfolio Growth 60 0 0.00231 0.00929 0.07198 0.00518 -0.13973

Variable Q1 Median Q3 Maximum


Portfolio Growth -0.05795 0.01323 0.06036 0.19402

For the second portfolio, as previously shown, W = -0.00231 and  W2 = 0.00518.

The second portfolio has a higher mean and a lower variance. Since risk is directly related to
variance, the second portfolio would be the better choice.

5.106 : Results are obtained using Minitab.


Mean and variance for stock price growth:
AB Pentair Reliant TCF Financial 3M Restoration
Volvo Inc. Energy Inc. Corporation Company Hardware Inc.
Mean 0.019592 0.007641 0.019031 -0.004087 0.001992 -0.013406
Variance 0.004805 0.006227 0.012686 0.004001 0.002704 0.027618

Copyright © 2013 Pearson Education


5-30 th
Statistics for Business & Economics, 8 edition

Covariances:
TCF
Reliant Financial 3M
AB Volvo Pentair Inc. Energy Inc. Corporation Company
Pentair Inc. 0.00074848
Reliant
Energy Inc. 0.00228027 0.00105381
TCF Financial
Corporation -0.00001514 -0.00021080 -0.00041228
3M Company 0.00099279 0.00087718 0.00031032 0.00072435
Restoration
Hardware Inc. 0.00117969 0.00169410 0.00055922 -0.00041072 0.00204408

Let the portfolio growth be represented by variable W. The mean and variance for this portfolio, W
and  W2 , can be found using the following equations or by using technology.

k k k 1 k
W   ai i ,  W2   ai2 i2  2 a a i j Cov( X i , X j )
i 1 i 1 i 1 j  i 1

Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum


Portfolio Growth 60 0 0.00513 0.00612 0.04740 0.00225 -0.16714

Variable Q1 Median Q3 Maximum


Portfolio Growth -0.02762 0.00631 0.04184 0.10438

As previously shown, W = 0.00513 and  W2 = 0.00225.

For the second portfolio (20% AB Volvo, 30% Pentair, 30% Reliant Energy, and 20% 3M
Company), we get the following output:

Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum


Portfolio Growth 60 0 0.01232 0.00680 0.05270 0.00278 -0.15522

Variable Q1 Median Q3 Maximum


Portfolio Growth -0.02121 0.01386 0.05357 0.10539

For the second portfolio, as previously shown, W = 0.01232 and  W2 = 0.00278.

The second portfolio has a higher mean and a higher variance. Recall that risk is directly related
to variance. Since the second portfolio has a significantly larger mean and only a slightly larger
variance, it would be the better choice.

Copyright © 2013 Pearson Education