QUANTITATIVE METHODS IN

MANAGEMENT
Chapter 4, 5 (part) : 149-188

DAY 6
Course content
Chapter Page number content
1 11-32 Introduction, variables, levels of measurement, types of statistics
2 33-98 Organizing and visualizing variables
3 99-148 Numerical descriptive measures – categorical / numerical – Measures of central
tendencies, measures of dispersion, skewness, kurtosis, measures of relations –
co variance and correlation
12 430-446 Simple linear regression, estimating bo and b1, measures of variations, SST, SSR
and SSE, coefficient of determination, coefficient of correlation.
4 149-182 Basic probability
5,6 183-232 Discrete probability distributions – binomial and poisson
Continuous probability distribution – Normal
7 234-257 Sampling distribution
8 258-293 Confidence interval – mean, proportion and determining sample size
9 294-304 Fundamentals of testing of hypothesis
11 402-415 Chi square test
15 15-1 to 15-17 Decision analysis
RECAP
• Introduction – definition, types of statistics, levels of
measurement
• Collection / compilation/ classification / tabulation
• Presentation – graphical and diagrammatic
• Measures of central tendencies
• Measures of dispersion
• Measures of skewness
• Exploratory data analysis
• Association between variables – covariance and
correlation
• Regression analysis – simple, measures of variations ( SSE,
SSR, SST, coefficient of determination and coefficient of
correlation)
INFERENCE STATISTICS
• Preliminaries  concepts on probability and random
variables, theoretical distributions
• Sampling distribution
• Estimation and
• Testing of hypothesis
Probability
• Concepts
• Definition - different ways of assigning probability.
• Understand and apply marginal, union, joint, and
conditional probabilities.
• Solve problems using the laws of probability including
the laws of addition, multiplication and conditional
probability
• Revise probabilities using Bayes’ rule.
 CERTAIN/ REAL UNCERTAIN/ABSTRACT
• Survey • Experiment

• Data • Events

• Descriptive statistics • Probability inference statistics

Introduction
• A student considers enrolling in a program and
would like to know how difficult it is. She obtains
the marks distribution of students who have
appeared for the most recent exam

Marks % # of students
0 – 25 45
25 – 50 280
50 – 75 205
75 –100 30
Introduction…
• Assuming the next exam is equally tough and
there is a same % of dull and bright students, she
can conclude that the % of students in the 4
classes of marks would be

Marks % # of students % of students

0 – 25 45 8
25 – 50 280 50
50 – 75 205 37
75 –100 30 5
Introduction…
• The first distribution is related to past data and is
a frequency distribution
• The second relates to the future and is called a
probability distribution
• Inference
• 8% of the students score 0 – 25 mks, 50% between 25
& 50 & so on
• If the student considers herself in the top 5%, she can
expect to score 75 – 100 mks
• She has a 8% chance of scoring 0 – 25 mks etc
Probability…
• Business decisions are often based on an analysis
of uncertainties such as
• What are the chances that sales will decrease if we
increase prices?
• What is the likelihood a new assembly method will
increase productivity?
• How likely is it that the project will be finished on
time?
• What are the odds in favour of a new investment being
profitable?
• What are the VPs prospects of turning around a dept?
Probability
• This chance is “PROBABILITY”
• Some of the earliest works on probability
originated in a series of letters between Pierre de
Fermat and Blaise Pascal in the 1650s
• First general theory of probability was initially
applied to gambling – 19th century – Pierre Simon
Laplace in his book “Theorie Analytique de
Probabilities” in 1812
Probability is
 A quantitative measure of uncertainty
 A measure of the strength of belief in the
occurrence of an uncertain event
 A measure of the degree of chance or likelihood of
occurrence of an uncertain event
 Measured by a number between 0 and 1 (or
between 0% and 100%)
 Basis for inference statistics
 Probability as a Numerical Measure
of the Likelihood of Occurrence

Increasing Likelihood of Occurrence

0 .5 1
Probability:

The event The occurrence The event

is very of the event is is almost
unlikely just as likely as certain
to occur. it is unlikely. to occur.
 Basic Probability Concepts

• Probability – the chance that an uncertain

event will occur (always between 0 and 1)

• Impossible Event – an event that has no chance of

occurring (probability = 0)

• Certain Event – an event that is sure to occur

(probability = 1)
 Events

Each possible outcome of a variable is an event/ collection of

sample points.

• Simple event
• An event described by a single characteristic
• e.g., A red card from a deck of cards
• Joint event
• An event described by two or more characteristics
• e.g., An ace that is also red from a deck of cards
• Complement of an event A (denoted A’)
• All events that are not part of event A
• e.g., All cards that are not diamonds
 Sample Space
The Sample Space is the collection of all possible events
e.g. All 6 faces of a die:

e.g. All 52 cards of a bridge deck:

Visualizing Events
• Contingency Tables
Ace Not Ace Total

Black 2 24 26
Red 2 24 26

Total 4 48 52

• Decision Trees 2
Sample
Space
Sample
Space 24
Full Deck
of 52 Cards
2

24
Definition
• Classical method of assigning probability (rules and
laws)

• Relative frequency of occurrence (cumulated

historical data)

• Subjective Probability (personal intuition or

reasoning)

• Axiomatic
Assessing Probability
There are three approaches to assessing
the probability of an uncertain event:
1. a priori -- based on prior knowledge of the process
X number of ways the event can occur
probability of occurrence  
Assuming
T total number of elementary outcomes
all
outcomes 2. empirical probability
are equally
likely number of ways the event can occur
probability of occurrence 
total number of elementary outcomes

3. subjective probability
based on a combination of an individual’s past experience,
personal opinion, and analysis of a particular situation
Example of a priori probability

Find the probability of selecting a face card (Jack, Queen,

or King) from a standard deck of 52 cards.

X number of face cards

Probabilit y of Face Card  
T total number of cards

X 12 face cards 3
 
T 52 total cards 13
Example of empirical probability
Find the probability of selecting a male taking statistics from the
population described in the following table:

Taking Stats Not Taking Total

Stats
Male 84 145 229
Female 76 134 210
Total 160 279 439

number of males taking stats 84

Probability of male taking stats    0.191
total number of people 439
Relative Frequency Approach
• Probability is defined as the proportion of
times A occurs, if the experiment is
repeated several times under the same or
similar conditions
• Example - An insurance company knows
from past data that of all men, 60 yrs old,
about 50 out of every 1,00,000 will die
within a year
P = 50 / 100000 = 0.0005
• As the number of trials increase, the
estimate would reach true probability
Empirical probability
• 383 of 751 business graduates were employed in the
past. The probability that a particular graduate will be
employed in his or her major area is 383/751 = 0.51
or 51%.

• The probability that your income tax return will be

audited if there are two million mailed to your district
office and 2,400 are to be audited is 2,400/2,000,000
= 0.0012 or 0.12%.
Relative Frequency Method
 Example: Lucas Tool Rental
Lucas Tool Rental would like to assign probabilities
to the number of car polishers it rents each day.
Office records show the following frequencies of daily
rentals for the last 40 days.
Number of Number
Polishers Rented of Days
0 4
1 6
2 18
3 10
4 2
Relative Frequency Method
 Example: Lucas Tool Rental
Each probability assignment is given by dividing
the frequency (number of days) by the total frequency
(total number of days).
Number of Number
Polishers Rented of Days Probability
0 4 .10
1 6 .15
2 18 .45 4/40
3 10 .25
4 2 .05
40 1.00
Subjective Probability
• Comes from a person’s intuition or reasoning
• Subjective -- different individuals may (correctly) assign different numeric
probabilities to the same event
• Degree of belief
• Useful for unique (single-trial) experiments
• New product introduction
• Initial public offering of common stock
• Site selection decisions
• Sporting events

Example – an analyst on share prices may opine that the price of Reliance share has a 20%
probability of increasing by Rs.500 in the next 2 months
• Estimating the probability that a person wins a jackpot lottery.
• Estimating the probability that the GM will lose its first ranking in car sales.
Axiomatic ( basic rules)
• Probability lies between 0 and 1
• P(sure event) = 1
• P( impossible event) = 0
• P(AUB) = P(A) +P(B) – P(AB)
Definitions
Simple vs. Joint Probability
• Simple Probability refers to the probability of a
simple event.
• ex. P(King)
• ex. P(Spade)

• Joint Probability refers to the probability of an

occurrence of two or more events (joint event).
• ex. P(King and Spade)
SIMPLE PROBLEMS
Problem
• An experiment with three outcomes has been repeated
50 times, and it was learned that E1 occurred 20 times,
E2 occurred 13 times, and E3 occurred 17 times.
Assign probabilities to the outcomes. What method
did you use?

• A decision maker subjectively assigned the following

probabilities to the four outcomes of an experiment:
P(E1)= .10, P(E2) = .15, P(E3)= .40, and P(E4) =.20.
Are these probability assignments valid? Explain.
• The following data are the results of a random
poll of machinists and foremen regarding a
wage package

Opinion Machinists Foremen

Strongly Support 9 10
Mildly Support 11 3
Undecided 2 2
Mildly oppose 4 8
Strongly oppose 4 7
• What is the probability that
• A machinist mildly supports.
• A foreman is undecided.

• What types of probability estimates are

these?
Problem sol…
• What is the probability that
• A machinist mildly supports (11/60)
• A foreman is undecided ( 2/ 60)

• What types of probability estimates are these?

(Relative frequency)
Problem
• Data on the functioning of photocopiers in the
office
Copier Days functioning Days out of service
---------------------------------------------------------------------
1 209 51
2 217 43
3 258 02
4 229 31
5 247 13
---------------------------------------------------------------------
What is the probability of a copier being out of
service?
Problem 4
• Availability of VC funding has provided a big boost to companies. In
2017, 2374 VC disbursements were made – of these, 1434 were made
to companies in Bangalore, 390 in Chennai, 217 in Hyderabad and 112
in Mumbai. 22% of companies were in early stages of development &
55% in an expansion stage. If you were to randomly chose a company,
what is the probability that the company will be
• Be from Bangalore?
• Not be from one of the four places mentioned?
• Not be in early stages of development?
• The total funds was 32.4 crores. Estimate the amount that went to Mumbai.
• How many companies in Chennai were in early stage of development if they
were evenly distributed across the cities ?
solution
a. 1434/2374
b. 221/2374
c. 78%
d. 112/2374*32.4 crores
e. 22% of 390
Exercise
• 6 states in the US have the largest number
of Fortune 500 companies
• New York 56 - California 53
• Texas 43 - Illinois 37
• Ohio 28 - Pennsylvania 28
If a Fortune 500 company is chosen for a
survey, what are the probabilities of the
following?
• P(New York)
• P(Texas)
Mutually Exclusive Events
• Mutually exclusive events
• Events that cannot occur simultaneously

Example: Drawing one card from a deck of cards

A = queen of diamonds; B = queen of clubs

• Events A and B are mutually exclusive

Collectively Exhaustive Events
• Collectively exhaustive events
• One of the events must occur
• The set of events covers the entire sample space

example:
A = aces; B = black cards;
C = diamonds; D = hearts

• Events A, B, C and D are collectively exhaustive (but

not mutually exclusive – an ace may also be a heart)
• Events B, C and D are collectively exhaustive and also
mutually exclusive
Addition theorem
If X and Y are mutually exclusive,
P( X  Y )  P( X )  P(Y )

Y
X
Law of Addition

P( X  Y )  P( X)  P(Y )  P( X  Y )

X Y
Rules of Probability- Addition
theorem
• The probability of the entire sample space is 1
• 0  p(A)  1

• Mutually exclusive events, p(A or B) = p(A) + p(B)

• For non mutually exclusive events, p(A or B) =
p(A) + p(B) – p(A and B)

Example – 80% of tourists visit Delhi, 70% visit

Mumbai and 60% visit both
• P(D or M) – 0.9
• P(D nor M) – 0.1
 Computing Joint and
Marginal Probabilities

• The probability of a joint event, A and B:

number of outcomes satisfying A and B
P( A and B) 
total number of elementary outcomes

• Computing a marginal (or simple) probability:

P(A)  P(A and B1)  P(A and B2 )    P(A and Bk )

• Where B1, B2, …, Bk are k mutually exclusive and collectively
exhaustive events
Joint Probability Example
P(Red and Ace)

number of cards that are red and ace 2

 
total number of cards 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Marginal Probability Example
P(Ace)

2 2 4
 P( Ace and Re d)  P( Ace and Black )   
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
 Marginal & Joint Probabilities In
A Contingency Table

Event
Event B1 B2 Total
A1 P(A1 and B1) P(A1 and B2) P(A1)

A2 P(A2 and B1) P(A2 and B2) P(A2)

Total P(B1) P(B2) 1

Joint Probabilities Marginal (Simple) Probabilities

 Probability Summary So Far
• Probability is the numerical measure of the
likelihood that an event will occur 1 Certain

• The probability of any event must be

between 0 and 1, inclusively
0 ≤ P(A) ≤ 1 For any event A

• The sum of the probabilities of all mutually 0.5

exclusive and collectively exhaustive events is
1
P(A)  P(B)  P(C)  1
If A, B, and C are mutually exclusive and
collectively exhaustive
0 Impossible
 General Addition Rule

General Addition Rule:

P(A or B) = P(A) + P(B) - P(A and B)

If A and B are mutually exclusive, then

P(A and B) = 0, so the rule can be simplified:

P(A or B) = P(A) + P(B)

For mutually exclusive events A and B
 General Addition Rule Example

P(Red or Ace) = P(Red) +P(Ace) - P(Red and Ace)

= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
the two red
Color aces twice!
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
 Computing Conditional Probabilities
• A conditional probability is the probability of one event,
given that another event has occurred:

P(A and B) The conditional

P(A | B)  probability of A given
P(B) that B has occurred

P(A and B) The conditional

P(B | A)  probability of B given
P(A) that A has occurred

Where P(A and B) = joint probability of A and B

P(A) = marginal or simple probability of A
P(B) = marginal or simple probability of B
 Conditional Probability Example

 Of the cars on a used car lot, 70% have air

conditioning (AC) and 40% have a CD player (CD).
20% of the cars have both.

• What is the probability that a car has a CD player,

given that it has AC ?

i.e., we want to find P(CD | AC)

 Conditional Probability Example
(continued)
 Of the cars on a used car lot, 70% have air conditioning (AC) and 40% have a CD
player (CD).
20% of the cars have both.

CD No CD Total

AC 0.2 0.5 0.7

No AC 0.2 0.1 0.3
Total 0.4 0.6 1.0

P(CD and AC) 0.2

P(CD | AC)    0.2857
P(AC) 0.7
 Conditional Probability Example
(continued)
 Given AC, we only consider the top row (70% of the cars). Of
these, 20% have a CD player. 20% of 70% is about 28.57%.

CD No CD Total

AC 0.2 0.5 0.7

No AC 0.2 0.1 0.3
Total 0.4 0.6 1.0

P(CD and AC) 0.2

P(CD | AC)    0.2857
P(AC) 0.7
Using Decision Trees
.2
Given AC or no AC: .7 P(AC and CD) = 0.2

P(AC and CD’) = 0.5

.5
.7
All Conditional
Probabilities
Cars
.2
.3 P(AC’ and CD) = 0.2

.1 P(AC’ and CD’) = 0.1

.3
Using Decision Trees
(continued)
.2
Given CD or no CD: .4 P(CD and AC) = 0.2

P(CD and AC’) = 0.2

.2
.4
All Conditional
Probabilities
Cars
.5
.6 P(CD’ and AC) = 0.5

.1 P(CD’ and AC’) = 0.1

.6
Independence
• Two events are independent if and only if:

P(A | B)  P(A)
• Events A and B are independent when the probability of
one event is not affected by the fact that the other event
has occurred
Multiplication Rules

• Multiplication rule for two events A and B:

P(A and B)  P(A | B)P(B)

Note: If A and B are independent, then

P(A | B)  P(A)
and the multiplication rule simplifies to

P(A and B)  P(A)P(B)

Marginal Probability
• Marginal probability for event A:

P(A)  P(A | B1)P(B1)  P(A | B2 )P(B2 )    P(A | Bk )P(Bk )

• Where B1, B2, …, Bk are k mutually exclusive and collectively exhaustive events
Problem Contingency Table

Counts

AT& T IBM Total

Telecommunication 40 10 50
Probability that a project is
undertaken by IBM given it is a
Computers 20 30 50 telecommunications project:

Total 60 40 100

Probabilities
P ( IBM  T )
AT& T IBM Total P ( IBM T ) 
P (T )
Telecommunication .40 .10 .50
0.10
  0.2
Computers .20 .30 .50 0.50

Total .60 .40 1.00

Problem
• Job Satisfaction scores (0-100)

<50 50-60 60-70 70-80 80-90

Carpenter 0 2 4 3 1

Lawyer 6 2 1 1 0

Therapist 0 5 2 1 2

System 2 1 4 3 0
Analyst
Problem ….
• Develop a joint probability table
• What is the p that one of the participants had a
score in the 80s
• What is the p of a score in the 80s given he was a
therapist
• What is the p that one of the participants was a
lawyer
• What is the p that one of the participants was a
lawyer and received a score under 50
• What is the p of a score under 50 given that he is
a lawyer
• What is the p of being a lawyer given that his
score is under 50
• What is the p of a score of 70 or higher
Problem
• Joint Probability table

<50 50-60 60-70 70-80 80-90 Total

Carpenter .000 .050 .100 .075 .025 .250

Lawyer .150 .050 .025 .025 .000 .250

Therapist .000 .125 .050 .025 .050 .250

System Analyst .050 .025 .100 .075 .000 .250

TOTAL .200 .250 .275 .200 .075 1.000

Problem
• Preference of a brand of soap in 4 cities

Delhi Kolkata Chennai Mumbai

Yes 45 55 60 50

No 35 45 35 45

No 5 5 5 5
opinion
Problem …
What is the probability that a consumer selected at
random
• Preferred the brand = 210/390
• Preferred the brand and was from Chennai = 60/390
• Preferred the brand given that he was from Chennai =
60/100
• Given that a consumer preferred the brand, what
is the p that he was from Mumbai = 50/210
Bayes’ Theorem
• Bayes’ Theorem is used to revise previously
calculated probabilities based on new information.

• Developed by Thomas Bayes in the 18th Century.

• It is an extension of conditional probability.

Bayes’ Theorem

P(A | B i )P(B i )
P(B i | A) 
P(A | B 1 )P(B 1 )  P(A | B 2 )P(B 2 )      P(A | B k )P(B k )

• where:
Bi = ith event of k mutually exclusive and collectively
exhaustive events
A = new event that might impact P(Bi)
Bayes’ Theorem …
Prior Probabilities

New Information

Bayesian Theorem

Posterior Probabilities
Bayes’ Theorem Example
• A drilling company has estimated a 40% chance of
striking oil for their new well.
• A detailed test has been scheduled for more
information. Historically, 60% of successful wells
have had detailed tests, and 20% of unsuccessful
wells have had detailed tests.
• Given that this well has been scheduled for a
detailed test, what is the probability
that the well will be successful?
 Bayes’ Theorem Example
(continued)

• Let S = successful well

U = unsuccessful well
• P(S) = 0.4 , P(U) = 0.6 (prior probabilities)
• Define the detailed test event as D
• Conditional probabilities:
P(D|S) = 0.6 P(D|U) = 0.2
• Goal is to find P(S|D)
 Bayes’ Theorem Example
(continued)
Apply Bayes’ Theorem:

P(D | S)P(S)
P(S | D) 
P(D | S)P(S)  P(D | U)P(U)
(0.6)(0.4)

(0.6)(0.4)  (0.2)(0.6)
0.24
  0.667
0.24  0.12

So the revised probability of success, given that this well has

been scheduled for a detailed test, is 0.667
 Bayes’ Theorem Example
(continued)

• Given the detailed test, the revised probability of a

successful well has risen to 0.667 from the original
estimate of 0.4

Prior Conditional Joint Revised

Event
Prob. Prob. Prob. Prob.
S (successful) 0.4 0.6 (0.4)(0.6) = 0.24 0.24/0.36 = 0.667
U (unsuccessful) 0.6 0.2 (0.6)(0.2) = 0.12 0.12/0.36 = 0.333

Sum = 0.36
Problem 13
The probability of 3 events A, B and C occurring
are
p(A) = .35 p(B) = .45 p(C) = 0.2
Assuming that A, B or C has occurred, the
probabilities of another event, X, occurring are
p(X/A) = .8 p(X/B) = .65 p(X/C) = 0.3

Find p(A/X), p(B/X) and p(C/X)

Problem
Prior Conditional Joint Posterior

P(A) P(X/A) = P(XA) = .80 * P(A/X) = .28/.6325

= .35 .80 .35 = .4427
= .28
P(B) P(X/B) = .65 P(XB) = .65 * .45 P(B/X)= .2925/.6325
= .45 = .2925 = .4624
P(C) P(X/C) = .30 P(XC) = .30 * .20 P(C/X) = .06/.6325
= .20 = .06 = .0949
P(X) = p(XA) + .6325 1.0000
p(XB) + p(XC)
Problem
.8 .8*.35 =.28 .28/.6325 =.4427

.35

.45 .65 .65*.45=.2925 .2925/.6325=.4624

.20
.3 .3*.2 = .06 .06/.6325=.0949

Prior Conditional Joint Posterior

Problem 14
When a machine is set correctly, it produces 25%
defectives – otherwise it produces 60% defectives.
From past experience, manufacturer knows that
the chances that the machine is set correctly or
wrongly is 50/50. The machine was set and
before production, one piece was inspected and
found to be defective. What is the probability of
the machine set up being correct?
Problem …
.25 5*.25 =.125 .29

.5

.5
.60 .5*.6 = .30 .71

Prior Condl Joint Posterior

Problem 15
An item is manufactured by 3 machines, M1, M2 and M3.
Out of the total manufactured during a specific
production period, 50% are manufactured on M1, 30% on
M2 and 20% on M3. 2% of the items are produced by M1
& M2 are defective, while 3% of those by M3 are defective.
All items are put into one bin. From the bin, one item is
drawn at random and is found to be defective. What is
the ‘p’ that it was made on M1, M2 or M3?
Problem …
.02 .01 .4546

.5

.3 .02 .006 .2727

.2
.03 .006 .2727

Prior Condl Joint Posterior

Problem 16
A doctor has decided to prescribe 2 new drugs
to 200 heart patients as follows: 50 get Drug
A, 50 get Drug B and 100 get both. The 200
patients were chosen so that each had a 80%
chance of having a heart attack, if given
neither drug. Drug A reduces the probability
of a heart attack by 35%, B by 20% and the 2
drugs taken together work independently. If
a randomly selected patient in a program has
a heart attack, what is the probability that
the patient was given both drugs?
Problem 16…
Prior Conditional Joint Posterior

P(A) P(H/A) = P(HA) = .52 * .25 P(A/H) = .13/.498

= .25 .8 * .65 = .520= .13 = .261
P(B) P(H/B) = P(HB) = .64 * .25 P(B/H)= .16/.498
= .25 .8*.8=.640 = .16 = .321
P(A&B) P(H/A & B) = P(HAB) = P(A&B/H) = .208/.498
= .50 .8*.65*.8=.416 .416*.5 = .418
= .208
P(H) .498 1.0000
Chapter Summary
• Discussed basic probability concepts
• Sample spaces and events, contingency tables, Venn diagrams, simple
probability, and joint probability

• Examined basic probability rules

• General addition rule, addition rule for mutually exclusive events, rule
for collectively exhaustive events

• Defined conditional probability

• Statistical independence, marginal probability, decision trees, and the
multiplication rule

• Discussed Bayes’ theorem

 Business Statistics:
A First Course
5th Edition

Chapter 5

RANDOM VARIABLES 183-188

Learning Objectives
In this chapter, you learn:
• The properties of a probability distribution
• To calculate the expected value and variance of
a probability distribution
Random Variable
• Numerical description of the outcome of the experiment

• A variable that assumes different numerical values as a

result of random experiments or occurrences

• The values assumed by these variables are random and

cannot be predicted

• Example - Rainfall measured in cms, temp in Celsius,

share prices
Definitions
Random Variables
• A random variable represents a possible numerical
value from an uncertain event.

• Discrete random variables produce outcomes that

come from a counting process (e.g. number of
courses you are taking this semester).

• Continuous random variables produce outcomes

that come from a measurement (e.g. your annual
salary, or your weight).
 Definitions
Random Variables

Random
Variables

Ch. 5 Discrete Continuous Ch. 6

Random Variable Random Variable
 Discrete Random Variables
• Can only assume a countable number of values
Examples:

• Roll a die twice

Let X be the number of times 4 occurs
(then X could be 0, 1, or 2 times)

• Toss a coin 5 times.

Let X be the number of heads
(then X = 0, 1, 2, 3, 4, or 5)
 Probability Distribution For A
Discrete Random Variable
A listing of all the outcomes of an experiment and the probability associated with each outcome.

Related to frequency distributions by simply replaces the actual numbers (frequencies) with the

proportion of the total at each level of frequency.

• A probability distribution for a discrete random variable is a mutually exclusive listing of

all possible numerical outcomes for that variable and a probability of occurrence associated
with each outcome.

Number of Classes Taken Probability

2 0.2
3 0.4
4 0.24
5 0.16
 Example of a Discrete Random Variable
Probability Distribution

Experiment: Toss 2 Coins. Let X = # heads.

4 possible outcomes
Probability Distribution
T T X Value Probability
0 1/4 = 0.25

T H 1 2/4 = 0.50
2 1/4 = 0.25
H T

Probability
0.50

0.25
H H
0 1 2 X
Discrete Random Variable
• A random variable that assumes a finite number of
values or an infinite sequence of values such as 0, 1,
2…. is a discrete random variable

• The number of values is limited

• Generated from experiments in which things are

‘counted’ not ‘measured’
Discrete Random Variable
• Example
• Number of people who visit a doctor
• Customers who place an order
• Number of defective radios in a shipment
• Gender of the customer
• Number of new subscribers to a magazine
• Number of bad checks received by a restaurant
• Number of absent employees on a given day
Continuous Random Variable

• A random variable that may assume any numerical value in

an interval or collection of intervals is a continuous random

variable

• Outcomes based on time, weight, distance or temperature

• Generated from experiments in which things are ‘measured’

not ‘counted’
Continuous Random Variable
• Example
• Temperature between 29oC and 30oC can be 29.1, 29.5
or 29.9
• Time between customer arrivals at a bank
• Current Ratio of a motorcycle distributorship
• Elapsed time between arrivals of bank customers
• Percent of the labor force that is unemployed
Discrete random variable Continuous random variable
• (X, p(x)) • (x, f(x))
• PMF (probability mass function) • PDF ( Probability Density
Function)
• P(x) = 1
• f(x)dx = 1

E(X) E(X)
V(X) V(X)
• Decide which of the following distributions are probability
distributions:
a. The distribution takes the values -2,-1 ,0,1 and P(-2) =-0.5, P(-1) =
0.7, P(0) = 0.2 and P(1) = 0.6
b. The distribution takes the values 1,2,3,4 and corresponding
probabilities are 0.1,0.2,0.25,0.3
c. The distribution takes the values 20,30,40,50 with corresponding
probabilities as 0.1,0.2,0.3,0.4
 Discrete Random Variables
Expected Value (Measuring Center)
• Expected Value (or mean) of a discrete
random variable (Weighted Average)
N
  E(X)   Xi P( Xi )
i1

X P(X)
• Example: Toss 2 coins,
0 0.25
X = # of heads,
1 0.50
compute expected value of X:
2 0.25
E(X) = ((0)(0.25) + (1)(0.50) + (2)(0.25))
= 1.0
 Discrete Random Variables
Measuring Dispersion
• Variance of a discrete random variable
N
σ   [X i  E(X)] P(Xi )
2 2

i1

• Standard Deviation of a discrete random variable

N
σ  σ2   i
[X
i1
 E(X)]2
P(Xi )

where:
E(X) = Expected value of the discrete random variable X
Xi = the ith outcome of X
P(Xi) = Probability of the ith occurrence of X
 Discrete Random Variables
Measuring Dispersion
(continued)

• Example: Toss 2 coins, X = # heads,

compute standard deviation (recall E(X) = 1)

σ  [X i
 E(X)] P(X i ) 2

σ  (0  1)2 (0.25)  (1  1)2 (0.50)  (2  1)2 (0.25)  0.50  0.707

Possible number of heads

= 0, 1, or 2
Probability Distribution
• Since the value of a RV cannot be predicted
accurately, probabilities are assigned to all the
likely values the variable might take
Example
Price of Share Probability
X P(X)
15 0.12
20 0.20
23 0.08
25 0.10
30 0.50
Total 1.00
Expected Value
• The Expected Value is the Mean of the probability
distribution
• It is the weighted average of the value that the RV
can assume
• The probabilities assigned are used as weights
• The mean price of the share is Rs.25.14
Discrete Distribution - Example

Distribution of Daily
Crises P
Number of r 0.5
Probability o
Crises 0.4
b
0 0.37 a 0.3
b
1 0.31 i
0.2
2 0.18 l 0.1
3 0.09 i
0
4 0.04 t 0 1 2 3 4 5
y
5 0.01 Number of Crises
Mean of the Crises Data Example

  E X    X  P( X )  115
.
X P(X) XP(X) P
r 0.5
0 .37 .00
o 0.4
1 .31 .31 b
a 0.3
2 .18 .36 b
0.2
i
3 .09 .27
l 0.1
4 .04 .16 i
0
t 0 1 2 3 4 5
5 .01 .05 y
Number of Crises
1.15
Variance & SD - Crises Data

 X    P( X )  141  
2

  
2
 141
.  119
2
. .
X P(X) (X- ) (X- ) 2 (X- ) 2 P(X)
0 .37 -1.15 1.32 .49
1 .31 -0.15 0.02 .01
2 .18 0.85 0.72 .13
3 .09 1.85 3.42 .31
4 .04 2.85 8.12 .32
5 .01 3.85 14.82 .15
1.41
Problem
• An auto dealer determines the demand he can
expect for autos during a 1-month period. The
probability of demand for 50, 55, 60 & 65 cars
sold per month is 0.15, 0.2, 0.3 and 0.35. Find
the expected value

(Expected # of cars sold during a 1- month

period is 59.25)
Problem
• A person expects a gain of Rs.80, Rs.120, Rs.160
and Rs.20 with associated probabilities of 0.2,
0.4, 0.3 & 0.1 respectively. If he wishes to
compare this with another security whose gains
are 150, 80 & 20 with prob of 0.1, 0.8 & 0.1
respectively, where would he invest?
Problem
Share 1 Share 2
Gain(X) P PX P(X- 𝑿)2 Gain(Y) P PY P(Y-Y)2
80 .2 16 231.2 150 .1 15 476.1
120 .4 48 14.4 80 .8 64 0.8
160 .3 48 634.8 20 .1 2 372.1
20 .1 2 883.6
 1.0 114 1764 1 81 849
Problem
Share 1 Share 2

Mean 114 81

Variance 1764 849

SD 42 29.14

CV 36.84% 35.97%

Return – Share 1
Risk – Share 2
Problem
The probability distribution for the # of TV sets
per household is
X 0 1 2 3 4 5
P(X) .01 .23 .41 .2 .1 .05

• Compute the expected value of # of TVs per household and

compare it with the average. What are the variance and SD
of the # of TV sets per household?

(EV = 2.3 / Variance = 1.23 / SD = 1.11)

• A software company conducts a survey among its programmers and project
leaders regarding their job satisfaction. The data obtained regarding job
satisfaction of 50 programmers and 15 project leaders is given below.
Job satisfaction score Programmers Project leaders
1 5 1
2 10 3
3 20 3
4 10 6
5 5 2

• Develop probability distribution for the job satisfaction of programmers and

project leaders.
• Find the mean and variance
• Who is more satisfied with his job, a randomly selected programmer or a
randomly selected project leader?
RANDOM VARIABLE
Bob Walters, who frequently invests in the stock market, carefully studies any potential investment.
He is currently examining the possibility of investing in the Trinity Power Company. Through
studying past performance, Walters has broken the potential results of the investment into five
possible outcomes with accompanying probabilities. The outcomes are annual rates of return on a
single share of stock that currently costs $150. Find the expected value of the return for investing in
a single share of Trinity Power
Return Investment 0.00 10.00 15.00 25.00 50.00
Probability 0.20 0.25 0.30 0.15 0.10

If Walters purchases stock whenever the expected rate of return exceeds 10 per cent, will he
purchase the stock, according to these data? What is your suggestion to Walters?

• Answer= Yes, he will purchase the stock because he carefully studies any potential investment.