LESSON 5

Continuous Probability
Distributions

8.2 Continuous Probability Distributions

A continuous random variable has an
uncountably infinite number of values in the
interval (a,b).
The probability that a continuous variable X will
assume any particular value is zero. Why?
1/4
1/3
1/2
0

The probability of each value

+
1/4
+
1/4
+
+
1/3
+
+
1/3

1/2

2/3

1/4 = 1
1/3 = 1
1/2 = 1
1

8.2 Continuous Probability Distributions

As the number of values increases the probability of each
value decreases. This is so because the sum of all the
probabilities remains 1.
When the number of values approaches infinity (because X
is continuous) the probability of each value approaches 0.
1/4
1/3
1/2
0

The probability of each value

+
1/4
+
1/4
+
+
1/3
+
+
1/3

1/2

2/3

1/4 = 1
1/3 = 1
1/2 = 1
1

Probability Density Function

To calculate probabilities we define a probability
density function f(x).
The density function satisfies the following
Area = 1
conditions
P(x1<=X<=x2)
f(x) is non-negative,
x1 x2
The total area under the curve representing f(x) equals 1.

The probability that X falls between x1 and x2 is

found by calculating the area under the graph of f(x)
between x1 and x2.
4

8.3 Normal Distribution

This is the most important continuous distribution.
Many distributions can be approximated by a normal
distribution.
The normal distribution is the cornerstone distribution
of statistical inference.

Normal Distribution
A random variable X with mean m and variance
s is normally distributed if its probability density
function is given by
x m
(1/ 2)

1
f ( x)
x
s 2
where 3.14159 ... and e 2.71828 ...

The Shape of the Normal Distribution

The normal distribution is bell shaped, and
symmetrical around m

90
m
Why symmetrical? Let m = 100. Suppose x = 110.
f (110)

1
s 2

110100
(1/ 2)

1
s 2

10
(1/ 2)
s
e

110
Now suppose x = 90

f (90)

1
s 2

90100
(1/ 2)

1
s 2

10
(1/ 2)

The effects of m and s

How does the standard deviation affect the shape of f(x)?
s= 2

s =3
s =4
How does the expected value affect the location of f(x)?
m = 10 m = 11 m = 12

Finding Normal Probabilities

Two facts help calculate normal probabilities:
The normal distribution is symmetrical.
Any normal distribution can be transformed into a
specific normal distribution called

STANDARD NORMAL DISTRIBUTION

Example
The amount of time it takes to assemble a computer is normally
distributed, with a mean of 50 minutes and a standard
deviation of 10 minutes. What is the probability that a
computer is assembled in a time between 45 and 60 minutes?
9

Finding Normal Probabilities

Solution
If X denotes the assembly time of a computer, we
seek the probability P(45<X<60).
This probability can be calculated by creating a new
normal variable the standard normal variable.
Every normal variable
with some m and s, can
be transformed into this Z.

X mx
Z
sx

E(Z) = m = 0

Therefore, once probabilities for Z

are calculated, probabilities of any
normal variable can be found.

V(Z) = s2 = 1

10

Finding Normal Probabilities

Example - continued
45 - 50
X m
60 - 50
P(45<X<60) = P(
<
<
)
s
10
10
= P(-0.5 < Z < 1)

To complete the calculation we need to compute

the probability under the standard normal distribution
11

Using the Standard Normal Table

Standard normal probabilities have been
calculated and are provided in a table .
The tabulated probabilities correspond
to the area between Z=0 and some Z = z0 >0
z
0.0
0.1
.
.
1.0
.
.
1.2
.
.

0
0.0000
0.0398
.
.
0.3413
.
.
0.3849
.
.

0.01
0.0040
0.0438
.
.
0.3438
.
.
0.3869
.
.

.
.
.

0.05
0.0199
0.0596
.
.
0.3531
.
.
0.3944
.
.

P(0<Z<z0)

Z=0
0.06
0.0239
0.0636
.
.
0.3554
.
.
0.3962
.
.

Z = z0

12

Finding Normal Probabilities

Example - continued
45 - 50
X m
60 - 50
P(45<X<60) = P(
<
<
)
s
10
10
= P(-.5 < Z < 1)
We need to find the shaded area

z0 = -.5

z0 = 1
13

Finding Normal Probabilities

Example - continued
45 - 50
X m
60 - 50
P(45<X<60) = P(
<
<
)
s
10
10
= P(-.5<Z<1) = P(-.5<Z<0)+ P(0<Z<1
P(0<Z<1)
z
0.0
0.1
.
.
1.0
.

0
0.0000
0.0398
.
.
0.3413
.

0.1
0.0040
0.0438
.
.
0.3438
.

0.05
0.0199
0.0596
.
.3413
.
0.3531
.

z0 =-.5z=0 z0 = 1

0.06
0.0239
0.636
.
.
0.3554
.

14

Finding Normal Probabilities

The symmetry of the normal distribution makes it
possible to calculate probabilities for negative
values of Z using the table as follows:

-z0

+z0

P(-z0<Z<0) = P(0<Z<z0)

15

Finding Normal Probabilities

Example - continued
0
0.0000
0.0398
.
.
0.1915
.

0.1
0.0040
0.0438
.
.
.
.

.3413
.1915

z
0.0
0.1
.
.
0.5
.

-.5

0.05
0.0199
0.0596
.
.
.
.

0.06
0.0239
0.636
.
.
.
.

.5

16

Finding Normal Probabilities

Example - continued
0
0.0000
0.0398
.
.
0.1915
.

0.1
0.0040
0.0438
.
.
.
.

.3413
.1915
.1915
.1915

z
0.0
0.1
.
.
0.5
.

-.5

0.05
0.0199
0.0596
.
.
.
.

0.06
0.0239
0.636
.
.
.
.

.5 1.0

P(-.5<Z<1) = P(-.5<Z<0)+ P(0<Z<1) = .1915 + .3413 = .5328

17

Finding Normal Probabilities

Example 8.2
The rate of return (X) on an investment is normally distributed
with mean of 10% and standard deviation of (i) 5%, (ii) 10%.
What is the probability of losing money?

0%

10%

0 - 10
(i) P(X< 0 ) = P(Z<
) = P(Z< - 2)
5

X
.4772
-2

=P(Z>2) = 0.5 - P(0<Z<2) = 0.5 - .4772 = .0228

2
18

Find Normal
Probabilities

Finding Normal Probabilities

Example 8.2
The rate of return (X) on an investment is normally distributed
with mean of 10% and standard deviation of (i) 5%, (ii) 10%.
What is the probability of losing money?

X
0%

10%

0 - 10
(ii) P(X< 0 ) = P(Z<
)
10

.3413
-1

= P(Z< - 1) = P(Z>1) = 0.5 - P(0<Z<1) = 0.5 - .3413 = .1587

1
19

Finding Values of Z
Sometimes we need to find the value of Z for a
given probability
We use the notation zA to express a Z value for
which P(Z > zA) = A

A
zA
20

Finding Values of Z
Example 8.3 & 8.4
Determine z exceeded by 5% of the population
Determine z such that 5% of the population is below

Solution
z.05 is defined as the z value for which the area on its right under the
standard normal curve is .05.
0.45
0.05

0.05
-Z0.05

Z0.05

1.645

21

NORMAL DISTRIBUTION Nms

Using EXCEL
Values of the normal probability density function:

fms (x)= NORMDIST(x, m s ,FALSE)

Values of the normal cumulative distribution

function:

Pms {X x} = NORMDIST(x, m s ,TRUE)

P {Z z} = NORMSDIST(z)

NORMAL DISTRIBUTION Nms

Example
Forecasting annual deficits is, at best, a risky exercise.

Last year, a deficit of $28B was anticipated; it was

actually $32B. This year $32B is expected. Past data
show that the standard deviation for annual deficits is
$5B. Assuming that the deficit amount follows a
normal distribution centered on the expected value,
what is the probability for the deficit to exceed $40B
this year?

NORMAL DISTRIBUTION Nms

Example
0.1

0.08

Required
probability
p = P{X > 40}

0.06

0.04

0.02

0
8

16

24

32

Deficit in billions of dollars

40

48

56

NORMAL DISTRIBUTION Nms

Example
Answer
The value of z corresponding to x = 40 is z = (40 -32)/5 = 1.6.
Using the table of normal curve areas and according to the previous
graph, we have
p = 0.5 - P{0 < X < 1.6} = 0.5 - 0.4452 = 0.0548

NORMAL DISTRIBUTION Nms

Example
Answer
The value of z corresponding to x = 40 is z = (40 -32)/5 = 1.6.
Using the table of normal curve areas and according to the
previous graph, we have
p = 0.5 - P{0 < X < 1.6} = 0.5 - 0.4452 = 0.0548
Using EXCEL (function NORMDIST), we obtain directly:
P{X > 40}=1 - P{X 40} = 1- NORMDIST(40, 32, 5, true) =
0.0548

NORMAL DISTRIBUTION Nms

Calculating an X-value from a known probability

In the deficit problem, we are now interested in determining the

dollar value D such that there is a 10% chance that this years
deficit be larger.
0.1

0.08

We want D
such that
P{ X > D} = 0.1

0.06

0.04

0.02

0
8

16

24

32

40

48

56

NORMAL DISTRIBUTION Nms

Calculating an X-value from a known probability

Answer
This time, the answer cannot be found directly in the table of normal
curve areas. Extrapolation from the table is required to find the z value
- call it d - corresponding exactly to a probability of 0.1 (or 0.4 = P{0 <
z < d}).
d must then be converted back to dollars (D) using
d = (D - m)/s . Here d = 1.2816 and D = 38.41

NORMAL DISTRIBUTION Nms

Calculating an X-value from a known probability

Answer
This time, the answer cannot be found directly in the table of normal
curve areas. Extrapolation from the table is required to find the z value
- call it d - corresponding exactly to a probability of 0.1 (or 0.4 = P{0 <
z < d}).
d must then be converted back to dollars (D) using
d = (D - m)/s . Here d = 1.2816 and D = 38.41
EXCEL has a function NORMINV which gives directly the required
answer:
D = NORMINV(0.9, 32, 5) = 38.41 ($B)

CENTRAL LIMIT THEOREM

Many probability distributions are not normal; nevertheless, if

the random variables X1 , X2 ,... are independent and have

the same probability distribution (with mean m, standard
deviation s), their sum behave normally when the number
of variables is sufficiently large :
X1 X2 Xn N (nm , s n )
or similarly:

X1 X2 Xn nm
N (0,1)
s n

CENTRAL LIMIT THEOREM

Example
In this supermarket, customers spend an average of $18.93

with a $12.52 standard deviation. One morning, 400

independent customers arrive in the store. What is the
probability that their total purchases exceed $8,000?

Answer : TP = X1 + + X400 . From the Central Limit

Theorem, total purchases are normally distributed with mean

nm = 400 18.93 = $7,572 and standard deviation
12,52 (400)0,5 = $250.40 P{TP > 8 000)= 1normdist(8000,7572,250.4, true)
= 0.0437

MORE NORMINV
Example
In the supermarket example (where total purchases follow a

normal distribution N(7572, 250.40)), we are interested in

finding the values M1 and M2 of total purchases such that, for
M1, there is a probability of 25% that M1 will not be exceeded
and, for M2, there is a probability of 25% that M2 will be
exceeded.

Answer:
M1 = norminv(0.25,7572,250.4) = $7,403.10
M2 = norminv(0.75,7572,250.4) = $7,740.89

8.5 Other Continuous Distribution

Three new continuous distributions:
Student t distribution
Chi-squared distribution
F distribution

33

The Student t Distribution

The Student t density function
[( n 1)]! t
f (t )
1
n [( n 2)]! n
2

( n 1) / 2

n is the parameter of the student t distribution

E(t) = 0

V(t) = n(n 2)

(for n > 2)
34

The Student t Distribution

0.2
0.15

n=3

0.1
0.05
0
-6

-5

-4

-3

-2

-1

0.2
0.15

n = 10

0.1
0.05
0
-6

-4

-2

35

Determining Student t Values

The student t distribution is used extensively in
statistical inference.
Thus, it is important to determine values of tA
associated with a given number of degrees of freedom.
We can do this using
t tables
Excel
Minitab
36

Using the t Table

The table provides the t values (tA) for which P(tn > tA) = A
A = .05

A = .05
The t distribution is
symmetrical around 0

tA =1.812

-tA=-1.812
t.100

t.05

t.025

t.01

3.078
1.886
.
.
1.372

6.314
2.92
.
.
1.812

12.706
4.303
.
.
2.228

31.821
6.965
.
.
2.764

200

1.286
1.282

1.653
1.645

1.972
1.96

2.345
2.326

Degrees of Freedom
1
2
.
.
10

t.005
63.657
9.925
.
.
3.169
.
.
2.601
37
2.576

The Chi Squared Distribution

The Chi Squared density function:
f ( )
2

1
[(n / 2) 1]!2n / 2

2 (n / 2) 1 2 2

( )

2 0

The parameter n is the number of degrees of

freedom.
38

The Chi Squared Distribution

0.0018
0.0016
0.0014
0.0012
0.001
0.0008
0.0006
0.0004
0.0002
0

n =5
n = 10

10

15

20

25

30

35

39

Determining Chi-Squared Values

Chi squared values can be found from the chi squared
table, from Excel, or from Minitab.
The 2-table entries are the values of the right hand
tail probability (A), for which P(n A = A.

10

152A

20

25

30

35

40

Using the Chi-Squared Table

To find 2 for which
P(2n<2)=.01, lookup
the column labeled
21-.01 or 2.99

A =.05

A =.99
0

Degrees of
freedom 995
1
0.0000393
.
.
10
2.15585
.
.
.
.

10

20
5
A

15

99

0.0001571

2.55821
.
.

.
.

25

30

35

5 5
3.84146

6.6349

7.87944

18.307

23.2093
.
.

25.1882
.
.

41

The F Distribution
The density function of the F distribution:
n1 n 2 2
n1 2
n1

! n 2
F 2
2
1

f (F)
n1 n 2
n1 2 n 2 2 n 2
n1F 2
2 ! 2 !
1

n2

F0

n1 and n2 are the numerator and denominator

degrees of freedom.
42

The F Distribution
This density function generates a rich family of
distributions, depending on the values of n1 and n2
n1 = 5, n2 = 10

0.01
0.008

n1 = 50, n2 = 10

0.006
0.004
0.002
0
0

0.008
0.007
0.006
0.005
0.004
0.003
0.002
40.001
0

n1 = 5, n2 = 10
n1 = 5, n2 = 1
5

43

Determining Values of F
The values of the F variable can be found in the
F table, Excel, or from Minitab.
The entries in the table are the values of the F
variable of the right hand tail probability (A), for
which P(Fn1,n2>FA) = A.

44