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1 = i
i i
) f(x x = E[X]
1 j =
j
2
j
) f(x E[X]) - (x = Var[X]
1 j =
j
2
j X
) f(x E[X]) - (x = o
Example
You play a lottery in which you buy a ticket
for $50 and are told you have a 1 in 1000
chance of winning $25,000. The random
variable X is your net winnings, and its
probability distribution is
x f(x)
-$50 0.999
$24,950 0.001
Calculations
E[X] = -$50(0.999) + $24,950(0.001) =
-$25.00
Var[X] = (-50 - [-25.00])2(0.999) +
(24,950 - [-25.00])2(0.001) = 624,375
Functions of Random
Variables
Two useful formulas:
E[aX] = aE[X]
Var[aX] = a
2
Var[X]
where a is any constant
Discrete Probability
Distributions
Bernoulli
Binomial
Poisson
Bernoulli Distribution
A random variable with two possible
outcomes (x = 0 and x = 1), each with
constant probabilities of occurrence:
f(x) = p if x = 1
f(x) = 1 p if x = 0
Binomial Distribution
n independent replications of a Bernoulli trial
with constant probability of success p on each
trial
Expected value = np
Variance = np(1-p)
( )
x
n
=
)! ( !
!
x n x
n
( )
otherwise
n x for p p
x
n
x f
x n x
0
,..., 2 , 1 , 0 ) 1 ( ) ( = =
Example
If the probability that any individual will react
positively to a new drug is 0.8, what is the probability
distribution that 4 individuals will react positively out
of a sample of 10
Excel Function
BINOMDIST(number_s, trials, probability_s,
cumulative)
Examples of the Binomial
Distribution
Poisson Distribution
Models the number of occurrences in some unit of
measure, e.g., events per unit time, number of items
per order
X = number of events that occur; x = 0, 1, 2,
Expected value = ; variance =
Poisson approximates binomial when n is large and p
small
otherwise
x for
x
e
x f
x
0
,... 2 , 1 , 0
!
) (
=
= =
Example
Suppose that the average number of customers
arriving at an ATM during lunch hour is l = 12
customers per hour. The probability that exactly x
customers will arrive during the hour is
Excel Function
POISSON (x, mean, cumulative)
Poisson Distribution ( = 12)
Properties of Continuous
Distributions
Continuous distributions have one or
more parameters that characterize the
density function:
Shape parameter controls the shape of
the distribution
Scale parameter controls the unit of
measurement
Location parameter specifies the location
relative to zero on the horizontal axis
Uniform Distribution
Density function
Distribution function
f x
b a
if a x b ( ) =
s s
1
0
1
if x a
F x
x a
b a
if a x b
if b x
<
=
s s
<
( )
a b
x
f(x)
= (a + b)/2
o
2
= (b a)
2
/12
a = location
b a = scale
Normal Distribution
Familiar bell-shaped curve.
Symmetric, median = mean = mode; half the area is on
either side of the mean
Range is unbounded: the curve never touches the x-axis
Parameters
Mean, (location)
Variance o
2
> 0 (scale)
Density function:
f(x) =
e
-(x- )
2
o
to
2
2
2
2
Standard Normal Distribution
Standard normal: mean = 0, variance = 1,
denoted as N(0,1)
See Appendix Table A.1
Standardized Normal Values
Transformation from N(,o) to N(0,1):
Standardized z-values are expressed in units
of standard deviations of X.
o
x
= z
Areas Under the Normal
Density
About 68.3% is within one sigma of the mean
About 95.4% is within two sigma of the mean
About 99.7% is within three sigma of the
mean
Normal Probability
Calculations
Customer demand averages 750
units/month with a standard deviation of
100 units/month.
Find P(X>900), P(X>700), P(700<X<900)
and the level of demand that will be
exceeded only 10% of the time.
P(X>900)
5 . 1
100
750 900
= z =
Area = 0.9332
Area = 0.0668
P(X>700)
5 . 0
100
750 700
= z =
s s
=
< s
Mean = (a + b + c)/3
Variance = (a
2
+ b
2
+ c
2
ab ac bc)/18
Exponential Distribution
Models events that occur randomly over time
Customer arrivals, machine failures
Properties of Exponential
Density function
Distribution function
Mean = 1/
Variance = 1/
2
Excel function EXPONDIST(x, lambda, cumulative).
f(x) = e
-x
, x > 0
F(x) = 1 - e
-x
, x > 0
Lognormal Distribution
X is lognormal if the distribution of lnX is
normal
Positively skewed, bounded below by 0
Models task times, stock and real estate
prices
Gamma Distribution
Family of distributions defined by shape o,
scale |, and location L
Defined for x > L
Models task times, time between events,
inventories
Weibull Distribution
Family of distributions defined by shape o,
scale |, and location L
When L = 0 and | = 1, same as exponential
with = 1/o.
Models results from life tests, equipment
failures, and task times.
Beta Distribution
Defined over the range (0, s)
Two shape parameters o and |; if equal, beta
is symmetric; o < |, positively skewed; if
either equals 1 and the other > 1, J
shaped.
Geometric Distribution
Sequence of Bernoulli trials that describes the
number of trials until the first success.
Negative Binomial
Distribution of number of trials until the r
th
success.
Logistic Distribution
Describes the growth of a population over
time.
Pareto Distribution
Distribution in which a small proportion of
items accounts for a large proportion of some
characteristic.
PHStat Tool: Probability &
Probability Distributions
PHStat menu > Probability & Probability
Distributions > choice of distribution:
Normal
Binomial
Exponential
Poisson
Hypergeometric
PHStat Output