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QuantitativeAnalysisforManagement I
RandomVariable
https://sites.google.com/a/iiml.ac.in/ggarg/home/teaching/qam1
AReviewofProbabilityTheory
RandomExperiment isanexperimentwhichresultsin
anyoneofthepossibleoutcomes,thoughrepeated
underidenticalconditions.Actualresultcannotbe
predicted.
SampleSpace isanexhaustivelistofallthepossible
outcomesofarandomexperiment.
Theoutcomesfavorabletoaneventinatrialarecalled
asfavorableoutcomes.
Therepetitionsoftheexperimentareknownastrials.
EquallyLikelyEvents
Ifthereisnoreasontoexpectoneinpreferencetotheothers.
ExhaustiveEvents
Asetofeventsiscalledcollectivelyexhaustiveifatleastone
outofthemmustoccur.
MutuallyExclusiveorDisjointEvents
Eventsarecalledmutuallyexclusiveifoccurrenceofoneof
themimpliesnonoccurrenceoftheremainingevents.
ComplementaryEvent
ThecomplimentaryeventofsomeeventA istheeventA
doesnotoccur,denotedbyAc orA.
A andAaremutuallyexclusiveaswellasexhaustive.
IndependentEvents
Occurrenceofaneventdoesnotaffecttheoccurrenceofthe
otherevent.
ClassicalDefinitionofProbability
S isasamplespace
A issomeeventinS. (A S )
nA isthenumberofoccurrencesofA
n isthetotalnumberofoutcomes.
TheProbabilityofeventA is
P( A)
nA
n
Limitations:
outcomesshouldbeequallylikely
totalno.ofoutcomesshouldbefinite.
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
AxiomaticDefinitionofProbability
S isasamplespace
A issomeeventinS. (A S )
AnumberP(A) isassignedtotheeventA
P(A) iscalledtheprobabilityoftheeventA ,ifit
satisfiesfollowing3axioms:
(i) P ( A) 0
(ii) P ( S ) 1
(iii) P ( A B ) P ( A) P ( B )
for any event B , provided A B
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
6/29/2014
AdditionLawofProbability
P(AUB) = P(A) + P(B) P(A B)
P(AUB) = P(A) + P(B), providedAB =
AB = meansA andB aremutuallyexclusive
Conditionalprobability
Probability ofA giventhatB hasalreadyoccurredis
P(A|B) = P(AB)/ P(B)
JointProbability ofA andB is
P(AB) = P(A|B) . P(B) or
P(AB) = P(B|A) . P(A)
WhenA andB areindependentevents,then
P(A|B)=P(A)
P(AB)=P(A).P(B)
ImportantProbabilityRules
IfS isasamplespace,then
P(S) = 1
P() = 0
IfA issomeeventinS,then
A Ac = , so P(A Ac) = 0
AUAc = S so P(AUAc) = 1
P(Ac) = 1 P(A)
Example:
Eachyear,ratingsarecompliedconcerningtheperformanceof
newcarsduringfirst90daysofuse.
Carsarecategorizedaccordingto
ifthecarneedswarrantyrelatedrepair
IfthecarismanufacturedinUSA
Basedonthedatacollected,itwasfoundthat
P(Carneedswarrantyrepair)=0.04
P(CarmanufacturedinUSA)=0.60
P(needswarrantyrepairandmanufacturedinUSA)=0.025
Makecontingencytable
Obtaintheprobabilitythat
AnewcarneedswarrantyrepairormanufacturedinUSA
AnewcarneedswarrantyrepairandnotmanufacturedinUSA
Example:
Inalotofusedcars
70%haveairconditioning(AC)
40%haveaCDplayer(CD)
20%ofthecarshaveboth.
WhatistheprobabilitythatacarhasaCDplayer,given
thatithasAC?
WewanttofindP(CD|AC).
CD
NoCD
Total
AC
0.2
0.5
0.7
NoAC
0.2
0.1
0.3
Total
0.4
0.6
1.0
0 .2
0 .4
0 .2
0 .7
Given AC or
no AC:
All
Cars
0 .5
0 .7
0 .2
0 .3
Given CD or
no CD:
All
Cars
0 .2
0 .4
0 .5
0 .6
0 .1
0 .3
P(AC and
CD/)
= 0.1
0 .1
0 .6
6/29/2014
IdeaofRandomVariable
Considerarandomexperimentoftossingafair
cointwice.
Supposeapersonplaysagamewhere
hewinsRs.100ifhegetsatleastoneheadin
twotosses,and
helosesRs.200otherwise.
Ifthepersonkeepsplayingthegameforalong
time,ishegoingtogainsomemoneyorloose?
Whatisthelongtermgainorlosstotheperson.
Theprobabilityofgettingatleastoneheadin
twotossesis
P({HH, HT ,TH})=3/4.
Sohehas75%chanceofwinningRs.100.
But,atthesametime,hecouldloseRs.200with
25%chance.
Nowhowtoincorporatethisideaofhisgain(or
loss)alongwiththeprobability.
Inmanysituations,Probabilityfailstoprovide
thequantitativemeasurementofthe
uncertainty.
Whatislackinginpreviousexample,issome
quantitativemeasurementofhisgain.
WedefineX ashisgainorprofitinthesame
game,then
X takesthevalue100whenhewins.
X takesthevalue200whenhelooses.
Noweachoftheseoutcomesisapartofthe
samplespace.
Soeachofthemhassomespecificprobabilityto
happen.
Wewriteitmoresystematicallyasfollows
Usingthecorrespondingprobabilities,wewrite
thesameideaas
Or
ThisvariableX iscalledrandomvariable.
MathematicalDefinition
Variablechangesitsvaluesdependingon
someotherfactor(unlikeconstant).
RandomVariablechangesitsvaluedepending
onwhatwegetasanoutcomeofarandom
experiment.
Thus,eachvalueofarandomvariableis
associatedwithaprobability.
Inotherwords,randomvariabletakesavalue
withsomeprobability.
Arandomvariableisafunctionthatassignsanumeric
valuetotheoutcomesofarandomexperiment
i.e.,
X : S R,
whereS isthesamplespace,R istherealline(-, ).
Example:
Considertherandomexperimentoftossingtwocoins
Samplespace:
S = {HH, HT, TH, TT }
X isnumberofHeadsappeared
X isarandomvariable
X cantakeanyvalueoutof0,1and2.
P(X =0) = P{TT} = 1/4,
P(X =1) = P{HT ,TH} = 2/4,
P(X =2) = P{HH} = 1/4.
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
6/29/2014
Example:
Considertherandomexperimentoftossingafairdie.
Samplespace:
S = {1, 2, 3, 4, 5, 6}
P(getting1) = 1/6 P(getting2) = 1/6
P(getting3) = 1/6 P(getting4) = 1/6
P(getting5) = 1/6 P(getting6) = 1/6
LetX bethevalueontheupperfaceofthedie
X couldbe1, 2, 3, 4, 5 or6
Theeventofgetting1 issameassayingX=1
So,
P(getting 1) = P(X=1) = 1/6
Similarly,
P(X=2) =1/6,
P(X=3) = 1/6,
P(X=4) = 1/6,
P(X=5) = 1/6,
P(X=6) = 1/6
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Considerthesameexampleagain.
S = {HHH, HHT, HTH, THH, HTT, THT, TTH, TTT}
X: no.ofheadsappearinginthreetosses
X belongsto{0, 1, 2, 3}
EventofgettingatleastoneheadissameasX 1
P(X 1) = P(HHH, HHT, HTH, THH, HTT, THT, TTH)
= 7/8
Similarly,wecanwrite
P(X 1) = P(HTT, THT, TTH, TTT) = 4/8
P(X < 2) = P(HTT, THT, TTH, TTT) = 4/8
P(X 2) = P(HHT, HTH, THH, HTT, THT, TTH, TTT)= 7/8
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Example:
Metrotrainsruneveryhalfhourbetween7:00AMto
7:00PMonacertainline.
Amanentersthestationatarandomtimeduringthis
period.
LetX betherandomvariablewhichdenotesthewaiting
timeinminutes.
X cantakeanyvaluebetween0 and30.
Samplespace: S = [0,30].
Theeventthathehastowaitforatmost10minutes
issameasX 10
P(X 10) = (10 0)/ (30 0) = 1/3
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Example:
Considertherandomexperimentoftossingafaircoin
thrice.
Samplespace
S={HHH, HHT, HTH, THH, HTT, THT, TTH, TTT}
X: no.ofheadsappearinginthreetosses
X isarandomvariable.
X couldbe0, 1, 2, or3.
P(X = 0) = P(TTT) = 1/8
P(X=1) = P(HTT, THT, TTH) = 3/8
P(X=2) = P(HHT, HTH, THH) = 3/8
P(X=3) = P(HHH) = 1/8
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Example:
Considertherandomexperimentofdrawingtwocardsat
randomfromawellshuffledpackof52cards.
Thesamplespace:
S = { CC, CD, CH, CS,
DC, DD, DH, DS,
HC, HD, HH, HS,
SC, SD, SH, SS
}
X: numberofDiamondCardsselected
X isarandomvariable.
X 1 istheeventthatatmostonediamondisselected
P(X 1) = 15/16
P(X = a) istheprobabilitythatX takesonthevaluea
P(X a) istheprobabilitythatX takesonavaluethatisless
thanorequaltoa
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
TypesofRandomVariables
RandomVariablesareoftwotypes:
DiscreteRandomVariable
ContinuousRandomVariable
DiscreteRandomVariable takesonlyacountable(finite
orcountablyinfinite)numberofvalues.
no.ofaccountsopened,
no.ofcarssold,
Fridaynightattendanceatacinema,
no.ofdefectivebulbsinabox,etc.
Discreterandomvariablesusuallycounttheitems.is
RangesetofX isthecollectionofallpossiblevaluesofX
Rangesetofadiscreterandomvariableiscountable.
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
6/29/2014
ContinuousRandomVariable takesonanyvalueswithin
aninterval.
weightoffertilizerpackedinabag,
amountofsugarinanorange,
timerequiredtorunamile,
priceofastock,etc.
Continuousrandomvariableisusuallyameasurement.
Itcantakeanuncountablyinfinitenumberofvalues.
Rangesetofacontinuousrandomvariableisan
interval.
Itcanbeoftypes(-, ), (-, 0), (0, ) or (a, b).
MoreExamples
RandomVariable
Values
Type
Flipacointhreetimes;
X = thetotalnumberofheads.
{0,1,2,3}
RangeSetisFinite
DiscreteRandomVariable
Selectamutualfund;
X = thenumberofcompaniesinthe
fundportfolio.
Measurethelengthofanobject;
X = itslengthincentimeters.
{2,3,4,...}
RangeSetisCountably Infinite
DiscreteRandomVariable
Anypositive
number
RangeSetisUncountable
Continuous RandomVariable
{1,2,3,4,...}
RangeSetisCountably Infinite
DiscreteRandomVariable
{0,1,2,3,4,...,
100}
RangeSetisFinite
DiscreteRandomVariable
{$0,$1,$2,
$3,}
RangeSetisCountably Infinite
DiscreteRandomVariable
Anypositive
number
RangeSetisUncountable
Continuous RandomVariable
Throwtwodiceoverandoveruntil
yourolladoublesix;
X = thenumberofthrows.
Takeatruefalsetestwith100
questions;X = no.ofquestions
answeredcorrectly.
Invest$10,000instocks;
X = thevalue,tothenearest$1,of
yourinvestmentafteranyear.
Selectagroupof50peopleat
random;
X = exactaverageheight(inm)ofthe
group.
ProbabilityDistributionofaDiscreteRandom
Variable
AlsocalledasProbabilityMassFunction(pmf).
Itisamutuallyexclusivelistingofallpossiblevaluesof
thediscreterandomvariablealongwithcorresponding
probabilities.
Example:
Xisthenumberofheadsappearedintwocoinstossing
experiment.
Xisadiscreterandomvariablehavingtheprobabilitydistribution
probability mass function of X is
1 / 4, if x 0
p ( x) 2 / 4, if x 1
1 / 4, if x 2
Probabilities
0.6
p1,p2,p3,.arenonnegative.
Togethertheysumupto1.
0.5
0.4
0.3
0.2
0.1
0
x=0
x=1
x=2
Example:
Inthrowingadie,Xisthevaluesappeared
Xisadiscreterandomvariablehavingtheprobabilitydistribution
RecallthefirstexamplewhereX istherandomvariable
denotingthegainandisgivenby
Intabularformat,theprobabilitydistributionofX is
givenby
Probabilities
0.2
0.15
ProbabilitymassfunctionofX iswrittenas
0.1
0.05
0
x=1
x=2
x=3
x=4
x=5
x=6
3 / 4 if x 100
p( x)
1 / 4 if x 200
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
6/29/2014
Sometimes,thepmf canbeexpressedasa
mathematicalfunction.
Example:
Xdenotesthenumberoftossesneededtoget
thefirsttail.
Xisadiscreterandomvariable.
SotherandomvariableXhastheprobabilitydistribution
probability mass function of X is
1/ 2
1 / 22
p( x)
3
1 / 2
if x 1
if x 2
if x 3
probabilitymassfunctionp(x) canalsobewrittenas
Also,
1
x
2
3
1 1 1
1
p ( x ) 2 1
1
2 2 2
x 1
x 1 2
1
2
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Example:
Considerthepreviousexampleagain.
Thediscreterandomvariablehasthepmf
Theprobabilityofgettingatailinlessthan3tossesis
givenby
P(X<3)=P(X=1)+P(X=2)
=p(1)+p(2)
=(1/2)+(1/2)2
=1/2+1/4
=3/4
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
ExpectationofaDiscreteRandomVariable
X isadiscreterandomvariablehavingthe pmf p(x)
ExpectationorExpectedvalueormeanofXisgivenby
RecallthefirstexamplewhereX istherandomvariable
denotingthegain
pmfofX is
3 / 4 if x 100
p( x)
1 / 4 if x 200
Expectedgainofthepersonis
E(X) =(100)(3/4)+(200)(1/4)=25Rupees
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Example:
Supposeanindividualpurchasestwoelectronic
components
Eachofwhichmayeitherbedefectiveoracceptable.
Samplespace:S = {DD, DA, AD, AA}
Giventhat
P(DD) = 0.09,
P(DA) = 0.21,
P(AD) = 0.21,
P(AA) = 0.49.
X: numberofacceptablecomponents.
ObtaintheprobabilitydistributionofX.
Whatistheprobabilityofgettingatleastone
acceptablecomponents?
Ans:0.91
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Expectationofarandomvariablecanbeinterpreted
assomesortofaverage ofallthevaluesthatthe
randomvariabletakes.
So,expectedvalueofarandomvariableisthecenter
ofitsdistribution.
Theconceptofexpectationisanalogoustothe
physicalconceptofthecenterofgravityofa
distributionofmass.
Ifa andb areconstants;andX andY arerandom
variables,thenwehave
E(a)=a,
E(aX)=aE(X),
E(aX+bY)=aE(X)+bE(Y).
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
6/29/2014
Example
SupposeX isadiscreterandomvariablehavingfollowing
probabilitydistribution
x
p(x)
0.4
0.2
0.3
Example
Considertherandomexperimentoftossingafair
coin.
Whatistheexpectednumberoftossesneededtoget
thefirsttail.
Recalltheexamplediscussedearlier.
RandomvariableX isthenumberoftossesneededto
getthefirsttail.
pmf ofX isgivenas
FindE(X).
Ans:0.6
Example
Ashipmentof6televisionsetscontains2defectivesets.
Ahotelmakesarandompurchaseof3ofthesets.
IfX istheno.ofdefectivesetspurchasedbythehotel.
Howmanydefectivesetsareexpected?
Ans:1
WehavetofindE(X)
Ans:2
VarianceofaDiscreteRandomVariable
Theideaofcenterisnotenoughtosummarizea
probabilitydistribution.
Weneedsomeideaofvariabilityalso.
VarianceofarandomvariableX isdefinedas
Var ( X ) X2 E
X E ( X )
2
E X 2 E ( X )
Itistheexpectedsquareddeviationofpossible
valuesofX fromitsmean.
E ( X 2 ) x 2 p( x) and E ( X ) x p( x),
x
XYisthecovariancebetweenX andY.
(willbediscussedlater)
Example
SupposeX isadiscreterandomvariablehavingfollowing
probabilitydistribution
x
p(x)
0.4
0.2
0.3
JointProbabilityDistributionoftwoDiscrete
RandomVariables
LetX andY betwodiscreterandomvariable
Jointprobabilitydistributionorjointprobabilitymass
functionofX andY is
FindVar(X).
XY b1
Ans:1.64
a1
a2
.
.
an
Example
Ashipmentof6televisionsetscontains2defectivesets.
Ahotelmakesarandompurchaseof3ofthesets.
IfX istheno.ofdefectivesetspurchasedbythehotel.
FindVar(X).
Ans:2/5
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Possible values of Y
b2
bm
Total
p11
p21
p12
p22
p1m
p2m
p1.
p2.
.
.
pn1
.
.
pn2
.
.
.
.
pnm
.
.
pn.
Marginal pmf of X
Total p.1
p.2
p.m
Marginal pmf of Y
Possible values of X
6/29/2014
Example:
Afaircoinistossedonce.
LetX denotethenumberofheads.
Y denotethenumberoftails.
FindthejointprobabilitymassfunctionofX and
Y.
Y
Ans
Total
Total
1/2
1/2
1/8
2/8
1/8
4/8
1/2
1/2
1/8
2/8
1/8
4/8
1/2
Total 1/8
3/8
3/8
1/8
Total 1/2
CovariancebetweentwoDiscrete
RandomVariables
X andY aretwodiscreterandomvariables.
Covarianceisameasureofstrengthofrelationship
betweenX andY.
Itisgivenby
XY
E { X E ( X )}{Y E (Y )}
E ( XY ) E ( X ) E (Y )
n
Here,
E ( XY ) ai b j pij
i 1 j 1
E ( X ) a i p i ,
i 1
E (Y ) b j p j
Example:
Afaircoinistossedthreetimesindependently.
LetX denotetheno.ofheadsonthefirsttoss;
Y denotethetotalno.ofheads.
ObtaincovariancebetweenX andY.
Example:
Afaircoinistossedonce.
LetX denotethenumberofhead.
Y denotethenumberoftail.
ObtaincovariancebetweenX andY.
j 1
IndependenceoftwoDiscreteRandomVariables
Example:
Giventhefollowingprobabilitydistributionforthe
randomvariablesX andY
Example:
Afaircoinistossedthreetimesindependently.
X: no.ofheadsonthefirsttoss;
Y: totalno.ofheads.
Findthejointpmf ofX andY.
Ans
P(XiYi)
0.2
0.4
X
100
50
Y
50
30
0.3
200
20
0.1
300
20
Compute
E(X), E(Y), E(X+Y)
X ,Y , XY
Var (X+Y) = Var (X) + Var (Y) + 2 XY = ?
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
6/29/2014
ProbabilityDistributionofaContinuousRandom
Variable
X iscontinuousrandomvariable.
RangesetRx ofXisanintervalontherealline.
X cantakeinfinitenumberofvaluesandtheyare
alwaysuncountable.
Wecannotassignaprobabilitytoeachpossible
value.
pmf isdefinedonlyforpointsx1,x2,
Pointprobabilityp(x) becomesmeaninglessin
thiscase.
Theprobabilitydistributionofacontinuousrandom
variableisgivenbyprobabilitydensityfunction(pdf)
pdf isdefinedas
f ( x) lim h0
Provided
P ( a X b) P ( a X b)
P ( a X b)
P ( a X b)
b
f ( x)dx
f(x) dx 1.
RX
ConsideracontinuousrandomvariableX.
pdf of X isf(x) withrangesetRx
ProbabilitythatX takesthevaluesonaninterval
(a,b) or(a,b] or[a,b) or[a,b] isgivenby
1
h
h
P x X x
2
2
h
Example:
LetX isarandomvariablewithprobabilitydensity
functiongivenby
Showthatf(x) isavalidpdf.
FindP(X>2)andP(1<X<2).
Example:
LetX isarandomvariablewithpdf
Showthatf(x) isavalidpdf.
FindP(X>1/2)andP(0<X<1/2).
ExpectationofaContinuousRandomVariable
IfX isacontinuousrandomvariable.
TheprobabilitydensityfunctionofX isf(x).
TherangespaceofX isRX.
ThentheExpectationofX isgivenby
E( X )
xf ( x)dx
RX
Example:
IfX isacontinuousrandomvariablewithpdf
Example:
IfX isacontinuousrandomvariablewithpdf
FindE(X).
Ans:3/4
Example:
IfX isacontinuousrandomvariablewithpdf
f(x)=k,0<X<2,
Findk
FindE(X)
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
6/29/2014
VarianceofaContinuousRandomVariable
X isacontinuousrandomvariable.
Var ( X ) X2 E X E ( X )
E ( X )
E X
where
E( X 2 )
f ( x) dx and
E( X )
RX
xf ( x)dx
RX
f(x)ispdf ofX,
RX istherangespaceofX.
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Example:
IfX isacontinuousrandomvariablewithpdf
FindVar(X).
Example:
IfX isacontinuousrandomvariablewithpdf
f(x)=1/2,0<X<2,
FindVar(X)
Example:
IfX isacontinuousrandomvariablewithpdf
f(x) = a e-ax, a > 0, x > 0.
FindVar(X).
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
Summary
RandomVariable
DiscreteRandomVariable
o Probabilitymassfunctionofadiscreterandomvariable
o Expectationofadiscreterandomvariable
o Varianceofadiscreterandomvariable
o Jointprobabilitymassfunction
o Covariancebetweentwovariables
o Independenceoftworandomvariables
ContinuousRandomVariable
o Probabilitydensityfunctionofacontinuousrandomvariable
o Expectationofacontinuousrandomvariable
o Varianceofacontinuousrandomvariable
QAM - I by Prof. Gaurav Garg (IIM Lucknow)
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