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ADM 2303 Brief Review

• We considered Continuous random variables
STATISTICS FOR • Uniform distribution
• Calculating probabilities

MANAGEMENT I • Expected value, Variance, Standard deviation

• Normal distribution
• Calculating probabilities
• Sketch and identify the area of interest
Week 6 – Continuous Random Variables – • Determine the z-score
Part II • Enter table and determine area
• Translate area into probability of interest

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Example – Normal probability

• If X is a normal random variable with parameters
 = 3
and  = 3 find  2 < < 5 .

CONTINUOUS RANDOM
VARIABLES
Chapter 9 (Sections 9.10-9.11, 9.3), Chapter 6

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Normal Probability Plots Non-normal Models

• In practice, we may not know • Normal probability plots for models which are not normally
whether a variable is normally distributed do not follow a straight line – see below:
distributed
• We then consider a special plot Histogram
Normal Q-Q Plot

called a Normal Probability plot

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which will determine whether the

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normal model is appropriate

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• The Normal Probability Plot

Sample Quantiles

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compares the z-scores with the

Frequency
values from the theoretical

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distribution.

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1
• If the Normal model is appropriate, Copyright © 2014 Pearson Canada Inc.

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then the data falls along a straight

0
0
line – see example 0 1 2 3 4 5 -2 -1 0 1 2

x4 Theoretical Quantiles

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Normal Approximation to Binomial Normal Approximation to Binomial

• In addition to calculating normal probabilities, the Normal • Graphically, with n = 10 and p = 0.5 we have:
model may also be used to approximate probabilities such
as those from the Binomial distribution
• The Normal approximation to binomial holds if
• The expected number of successes and failures sufficiently high
( >  and   − > ) then the Normal model provides an
adequate approximation
• We also need to apply a continuity correction
• Since we are using a continuous distribution (Normal) to approximate a
Discrete distribution (Binomial)

• NOTE: Recall that the Poisson distribution is used to

approximate the Binomial distribution if the expected
number of successes/failures is small ( < 10)

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Normal Approximation to Binomial
• Graphically, with n = 100 and p = 0.5 we have:
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Example – Advertising Company
An advertising company conducted an ad campaign aimed
at making consumers in a Western province aware of a
new product. Upon completion of the campaign, the agency
claimed that 20% of consumers in the province had
become aware of the product. The product’s distributor
surveyed 1000 consumers in the province and found that
175 were aware of the product.
a) Assuming the ad agency’s claim is true, verify that you
may use the normal approximation to the binomial.
b) Find the probability that 175 or fewer consumers in a
random sample of 1000 consumers would be aware of
the product.
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Continuity Correction
• When we use a continuous model to model a set of
discrete events, we may need to make an adjustment
called the continuity correction
• We add or subtract 0.5 as follows:
• ( ≤ ≤ ) ≈ ( − 0.5 ≤ ≤  + 0.5)
•  ≤  ≈ ( ≤  + 0.5)
•  ≥  ≈ ( ≥  − 0.5)
• Then, we calculate z-scores on the corrected values, e.g.
  ≤ ≤  ≈   − 0.5 ≤ ≤  + 0.5
!".#$ %& ($".#$ %&
=   ≤ −  ≤
'& '&
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Exponential Distribution
• An exponential model arises in practice to model the
distribution of the amount of time until a specific event occurs
• For example, we can model the time
• Until the next earthquake, hit to a website
• Until the next car to join a queue
• Until the next match between a client and a salesperson
• Note that the Exponential model has a link to the Poisson
model
• Note also the parallel between the Exponential model and the
geometric model
• Geometric model measures the number of trials until the next success
• Exponential model measures the amount of time until the next
“change”
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Exponential Density Function Family of Exponential PDFs

• The Exponential probability density function (pdf) has a
single parameter denoted λ (λ > 0) and can be expressed

1.0
lambda = 0.5
as: lambda = 1
lambda = 2

1.0
lambda = 5

0.8
$λ* .) + ≥ 0
)* (+) = ,λ-

0.8
0 .) + < 0

0.6
f(x)
0.6
f(x)

0.4
0.4

0.2
0.2

0.0
0 5 10 15 20 0 5 10 15 20
x
x

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Exponential Distribution – Exponential Distribution –

Mean and Variance Calculating Probabilities
• In order to calculate probabilities for an exponential
For the exponential distribution, we have distribution, we have the following formula (referred to as
the Cumulative Distribution Function):
/
Mean:
 =
λ 3  = <
(
= 4 λ - $λ* 5+
/ "
Variance: 0 = = 1 − exp −λ
λ1
Where  > 0
Coefficient of variation: ν = 1

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Example – Vibration Test Example – Vibration Test

The failure of a mechanical assembly in a vibration test • Define X = amount of time until the first failure (in hours)
/
• ~:+;-<.= λ = = 0.0025
occurs at a rate of 1 failure per 400 hours. Assume that the
number of failures can be modeled as a Poisson random >""
variable.
(a) The expected value and standard deviation are:
a) Find the expected amount of time until a failure and the
/ /

 = = = 400 hours
standard deviation.
λ ".""0#
b) Find the probability that a failure will occur in the next
100 hours.
/ / /
 = = = = 400 hours
λ1 (".""0#)1 ".""0#

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Functions of Dependent Random

Example – Vibration Test Variables
(b) To find the probability that a failure will occur in the next
100 hours, we find • For general random variables X and Y (not necessarily
Normally distributed), if X and Y are dependent, note the
 < 100 = 3 100 = 1 − - $λ /""
following:

= 1 − - $".""0# /""
• The rule for the expected value remains unchanged
• The calculation of the variance is altered
= 1 − - $".0# • We now consider the covariance between the dependent random
= 1 − 0.7788 variables X and Y:

= 0.2212 BC + D = BC + BC D + 2EFB( , D)

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Covariance Correlation – Standardizing Covariance

• The covariance is used to measure how X and Y are • It is convenient to standardize EFB( , D) by adjusting the
associated with each other (since they are dependent) size of the spread of each random variable X and Y
• The standardized measure is called the correlation
coefficient, denoted LH (rho)
• The covariance is denoted EFB( , D) and is defined as:
EFB( , D)
EFB , D = : −
 D −
H = E XY − E X E(Y) LH =
 H

• Note that LH represents the population correlation, which

is estimated by the sample correlation (denoted C) that will
be discussed in a subsequent class
• Modifying the above equation we may write
EFB , D = LH  H

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Summary:
Interpreting the Correlation Coefficient
Functions of a Single Random Variable
• Note that the correlation coefficient LH is bounded:
• Adding a constant (M)
−1 ≤ LH ≤ 1 • Expected value: : +M =: +M
• Variance: BC + M = BC( )
N(O(!P) N(O()
• The correlation coefficient measures the strength of the • CV: ν= =
Q(!P) Q  !P
linear relationship between X and Y
• If LH > 0 then X and Y are positively linearly correlated
• Multiplying by a constant ():
• If LH < 0 then X and Y are negatively linearly correlated
• Expected value: :  = :( )
• Variance: BC  = 0 BC( )
N(O(() ( N(O()
• CV: ν= = =ν
Q(() (Q()

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Summary: Summary:
Functions of Two Independent Random Variables Functions of Two Dependent Random Variables
• Expected Value • Expected Value

: + D = : + :(D)
: M + 5D = M: + 5:(D)
• Variance
BC + D = BC + BC(D)
BC  + D = 0 BC +  0 BC(D)
: + D = : + :(D)
: M + 5D = M: + 5:(D)
• Variance
BC + D = BC + BC D + 2EFB( , D)

• When X and Y are independent BC  + D = 0 BC +  0 BC D + 2EFB( , D)

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Examples – Functions of Random

Subtraction of Random Variables Variables
• Note that a minus sign is a coefficient • Suppose we have two random variables with the following
mean and standard deviation:
• For instance, if X and Y are dependent, then find the
X Y
standard deviation of  = − D
X 80 12

• Note that  = − D
Y 20 3
can be re-expressed as:
1 + −1 D • First consider X and Y independent random variables.
• Hence using the previous notation,  = 1,  = −1. Then a) Let Z = 0.25X + Y. Find the standard deviation of Z:
we have U = 0.250 0 + H0 = 4.24

BC  = (1)0 BC + (−1)0 BC D + 2 1 −1 COV(X, Y) b) Let Z = X – 0.5Y. Find the standard deviation of Z:
= BC + BC D − 2EFB( , D) U = 0 + (−0. 5)0 H0 = 144 + 9/4 = 12.09

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Examples – Functions of Random Adding and Subtracting Normally

Variables Distributed Random Variables
• How would the answers change if LH = 0.5?
• Recall that only the variance is affected by dependency
• If the random variables X and Y follow a normal
a) Let Z = 0.25X + Y. Find the standard deviation of Z: probability model, i.e. ~[
 ,  and Y~[
H , H then
U = 0.250 0 + H0 + 2(0.25)LH  H any linear combination of these random variables will also
follow a normal distribution
144
= + 9 + 2 0.25 0.5 12 (3) = 5.196
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• The expected value of the new random variable is a linear
b) Let Z = X – 0.5Y. Find the standard deviation of Z: combination of the expected values of the random
variables X and Y
U = 0 + (−0. 5)0 H0 +2(1)(−0.5)LH  H
• The variance of the new random variables depends on
9 whether the random variables X and Y are independent
= 144 + − 2 0.5 0.5 12 (3) = 11.32
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Example – International Trade Inverse Problem

In an International Trade class, a professor stated that the • For most probability questions considered to date, we
Exports and Imports during one year of a given country are have the sequence:
estimated to have mean values of 80 B$ and 100 B$ with
standard deviations of 15B$ and 20 B$ respectively. He ⇒  ⇒ ]C- ⇒ C;.=.<^
also stated that the exports as well as imports can both be
considered to follow normal distributions.
• However we can also consider the inverse problem which
follows the reverse sequence:
A trade surplus is defined as exports minus imports.
Calculate the probability that there will be a positive trade
surplus. What assumption do you need to make in this C;.=.<^ ⇒ ]C- ⇒  ⇒
problem?

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Example – Inverse Problem Example - Tires

A company's manufacturing process uses 500 litres of
water at a time. A "scrubbing" machine then removes most
of a chemical pollutant before pumping the water into a
nearby lake. To meet federal regulations the treated water
must not contain more than 80 parts per million (ppm) of
the chemical. The machine's output can be described by a
Normal model with a standard deviation 4.2 ppm.
The air pressure in a randomly selected tire installed on a
new car is normally distributed with mean value of 31 lb/in2
and standard deviation 0.5 lb/in2.
What pressure +" (in lb/in.2) is exceeded by 90% of the
samples? (i.e. 90% of the samples have an air pressure of
more than +" ).

The company's lawyers insist that not more than 2% of the

treated water should be over the limit. In order to achieve
this, to what mean should the company set the scrubbing
machine? Assume the standard deviation does not change.

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Key Concepts
• For continuous random variables there are four main
types of questions:

1. Area Questions: Probability that X lies in some range

 > +/ , ( < +/ ), (+/ < < +0 )
2. Expected value: Uniform, Normal Exponential
3. Variance calculation: Uniform, Normal, Exponential
4. Inverse Problem: Uniform, Normal (using tables), Exponential

• Normal approximation to binomial