Lecture 4: Probability

Theory and Random

Variables

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 Probability Rules
 Complement rule
– Each simple event must belong to either A A
or .
Since the sum of the probabilities assigned to a
simple event is one, we have for any event A

P(A) =
P(A) = 11 -- P(A)
P(A)

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  Addition rule
– For any two events A and B

P(A or
P(A
P(A) =6/13 or B)
B) =
= P(A)
P(A) +
+ P(B)
P(B) -- P(A
P(A and
and B)
B)
+
P(B) =5/13
_
A
A and B) =3/13
(A or B) = 8/13
B

A or B
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 Multiplication rule
– For any two events A and B

P(A and
P(A and B)
B) == P(A)P(B|A)
P(A)P(B|A)
= P(B)P(A|B)
= P(B)P(A|B)

– When A and B are independent

P(A and
P(A and B)
B) = P(A)P(B)
= P(A)P(B)

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• Example 6.3
– A stock market analyst feels that
 the probability that a certain mutual fund will receive

increased contributions from investors is 0.6.

 the probability of receiving increased contributions from

investors becomes 0.9 if the stock market goes up.

 the probability of receiving increased contributions from

investors drops below 0.6 if the stock market drops.

 there is a probability of 0.5 that the stock market rises.

– The events of interest are:

A: The stock market rises;
B: The company receives increased
contribution.
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 Calculate the following probabilities
– The probability that both A and B will occur is
P(A and B). [Sharp increase in earnings].
– The probability that either A or B will occur is
P(A or B). [At least moderate increase in
earning].
– Solution
P(A) = 0.5; P(B) = 0.6; P(B|A) = 0.9
P(A and B) = P(A)P(B|A) = (.5)(.9) = 0.45
P(A or B) = P(A) + P(B) - P(A and B) = .5 + .6 - .45
=0.65

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 Random Variables and
Probability Distributions
A random experiment is a function that
assigns a numerical value to each simple
event in a sample space.
 A random variable reflects the aspect of a
random experiment that is of interest to us.
 There are two types of random variables
– Discrete random variable
– Continuous random variable.
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 Discrete and Continuous Random Variables
AA random
random variable
variable isis discrete
discrete ifif itit can
can assume
assumeonly
only
aa countable
countable number
number of of values.
values. A A random
random variable
variable
isis continuous
continuous ifif itit can
can assume
assume an an uncountable
uncountable
number of
number of values.
values.
iscrete random variable Continuous random variable
After the first value is defined
After the first value is defined,
the second value, and any value
any number can be the next one
thereafter are known.

0 1 2 3 ... 01/161/4 1/2 1

Therefore, the number of Therefore, the number of
values is countable values is uncountable

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 Discrete Probability Distribution
A table, formula, or graph that lists all
possible values a discrete random variable
can assume, together with associated
probabilities, is called a discrete probability
distribution..

– To calculate P(X = x), the probability that the

random variable X assumes the value x, add the
probabilities of all the simple events for which
X is equal to x.
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  Example
– Find the probability distribution of the random
variable describing the number of heads that
turn-up when a coin is flipped twice.
– Solution
Simple event x Probability x p(x)
HH 2 1/4 0 1/4
HT 1 1/4 1/4 if x=0 or 2
1 1/2
TH 1 p(x) =
1/4
2 1/4
TT 0 1/4 1/2 if x=1

X
0 1 2
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 Requirements of discrete probability
distribution
– If a random variable can take values xi, then the
following must be true:
1. 0≤ p(xi ) ≤ 1forallxi
2.∑ p(x ) = 1
allxi
i

The probability distribution can be used to calculate

probabilities of different events.
Example continued:

1 1 3
P(1≤ X ≤ 2) = P(X = 1) + P(X = 2) = + =
2 4 4
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 Probabilities as relative frequencies
– In practice, often probabilities are estimated from
relative frequencies
– Example
The number of cars a dealer is selling daily were
recorded in the last 100 days. This data was
summarized as follows:
Daily sales FrequencyEstimate the probability
0 5 distribution.
1 15
State the probability of
2 35
3 25
selling more than 2 cars a
4 20 day.
100
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 Solution
– From the table of frequencies we can calculate
the relative frequencies, which becomes our
estimated probability distribution .35
.25
Daily sales Relative Frequency .20
.15
0 5/100=.05
1 15/100=.15 .05
2 35/100=.35
0 1 2 3 X4
3 25/100=.25
4 20/100=.20 The probability of selling
1.00 more than 2 a day is

P(X>2) = P(X=3) + P(X=4)

= .25 + .20 =13.45
6.5 Expected Value and
Variance
 The expected value
– Given a discrete random variable X with values xi,
that occur with probabilities p(xi), the expected
value of X is
E(X) =
∑
all xi
xi ⋅ p(xi )

The expected value of a random variable X is the

weighted average of the possible values it can assume,
where the weights are the corresponding probabilities of
each xi.
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 Laws of Expected Value
¤ E(c) = c
¤ E(cX) = cE(X)
¤ E(X + Y) = E(X) + E(Y)
E(X - Y) = E(X) - E(Y)
¤ E(XY) = E(X)E(Y) if X and Y are independent
random variables.

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 Variance
– Let X be a discrete random variable with
possible
values xi that occur with probabilities p(xi), and
let
E(xi) = µ . The variance of X is defined to be
[ ]
σ 2 = E (X − µ)2 =
∑
all xi
(xi − µ)2p(xi )

The variance is the weighted average of the squared

deviations of the values of X from their mean µ , where
the weights are the corresponding probabilities of each xi.

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 Standard deviation
– The standard deviation of a random variable X,
denoted σ , is the positive square root of the
variance of X.
 Example 6.5
– The total number of cars to be sold next week is
described by the following probability
distribution
x 0 1 2 3 4
p(x) .05 .15 .35 .25 .20

– Determine the expected value and standard

deviation of X, the number of cars sold. 17
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x 0 1 2 3 4
E( X ) = µ = ∑ xi p( xi ) p(x) .05 .15 .35 .25 .20
i =1

= 0(0.05) + 1(0.15) + 2(0.35) + 3(0.25) + 4(0.20)

= 2.40
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V ( X ) = σ 2 = ∑ ( xi − 2.4) 2 p ( xi )
i =1

= (0 − 2.4) 2 (.05) + (1 − 2.4) 2 (.15) + ( 2 − 2.4) 2 (.35)

+ (3 − 2.4) 2 (.25) + ( 4 − 2.4) 2 (.20) = 1.24
σ = 1.24 = 1.11

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