The Central Limit Theorem

Suppose that a sample of size n is selected from a population that has mean µ and standard
deviation σ. Let X1, X2,· ·,· Xn be the n observations that are independent and identically
distributed (i.i.d.). Define now the sample mean and the total of these n observations as
follows:
Σn
i=1 Xi
X̄ =
n
n
Σ
T= Xi
i=1

The central limit theorem states that the sample mean X̄ follows approximately the normal
distribution with mean µ and standard deviation √σ n , where µ and σ are the mean and stan-
dard deviation of the population from where the sample was selected. The sample size n has
to be large (usually n ≥ 30) if the population from where the sample is taken is nonnormal.
If the population follows the normal distribution then the sample size n can be either small
or large.
To summarize: X̄ ∼ N (µ, √σ n).
To transform X̄ into z we use: z = σ
x̄− µ
√
n

Example: Let X be a random variable with µ = 10 and σ = 4. A sample of size 100 is taken
from this population. Find the probability that the sample mean of these 100 observations is
less than 9. We write P (X̄ < 9) = P (z < 9√−410 ) = P (z < − 2.5) = 0.0062 (from the standard
100
normal probabilities table).

Similarly the central limit theorem states that sum T follows approximately the normal
√
distribution, T ∼
N (nµ, nσ), where µ and σ are the mean and standard deviation of the
population from where the sample was selected.
To transform T into z we use: z = T√−nµ
nσ

Example: Let X be a random variable with µ = 10 and σ = 4. A sample of size 100 is

taken from this population. Find the probability that the sum of these 100 observations is
less than 900. We write P (T < 900) = P (z < 900−100(10)
√
100(4)
) = P (z < −2.5) = 0.0062 (from
the standard normal probabilities table).

Below you can find some applications of the central limit theorem.

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 Central limit theorem - Examples

Example 1

A large freight elevator can transport a maximum of 9800 pounds. Suppose a load of cargo con-
taining 49 boxes must be transported via the elevator. Experience has shown that the weight of
boxes of this type of cargo follows a distribution with mean µ = 205 pounds and standard deviation
σ = 15 pounds. Based on this information, what is the probability that all 49 boxes can be safely
loaded onto the freight elevator and transported?

Example 2

From past experience, it is known that the number of tickets purchased by a student standing in
line at the ticket window for the football match of U CLA against U SC follows a distribution that
has mean µ = 2.4 and standard deviation σ = 2.0. Suppose that few hours before the start of one of
these matches there are 100 eager students standing in line to purchase tickets. If only 250 tickets
remain, what is the probability that all 100 students will be able to purchase the tickets they desire?

Example 3

Suppose that you have a sample of 100 values from a population with mean µ = 500 and with
standard deviation σ = 80.

a. What is the probability that the sample mean will be in the interval (490, 510)?

b. Give an interval that covers the middle 95% of the distribution of the sample mean.

Example 4

The amount of mineral water consumed by a person per day on the job is normally distributed
with mean 19 ounces and standard deviation 5 ounces. A company supplies its employees with
2000 ounces of mineral water daily. The company has 100 employees.

a. Find the probability that the mineral water supplied by the company will not satisfy the
water demanded by its employees.

b. Find the probability that in the next 4 days the company will not satisfy the water demanded
by its employees on at least 1 of these 4 days. Assume that the amount of mineral water
consumed by the employees of the company is independent from day to day.

c. Find the probability that during the next year (365 days) the company will not satisfy the
water demanded by its employees on more than 15 days.

Example 5

Supply responses true or false with an explanation to each of the following:

a. The probability that the average of 20 values will be within 0.4 standard deviations of the
population mean exceeds the probability that the average of 40 values will be within 0.4
2
 standard deviations of the population mean.

b. P (X̄ > 4) is larger than P (X > 4) if X ∼ N (8, σ).

c. If X̄ is the average of n values sampled from a normal distribution with mean µ and if c is
any positive number, then P (µ − c ≤ X̄ ≤ µ + c) decreases as n gets large.

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Example 6

An insurance company wants to audit health insurance claims in its very large database of trans-
actions. In a quick attempt to assess the level of overstatement of this database, the insurance
company selects at random 400 items from the database (each item represents a dollar amount).
Suppose that the population mean overstatement of the entire database is $8, with population
standard deviation $20.

a. Find the probability that the sample mean of the 400 would be less than $6.50.

b. The population from where the sample of 400 was selected does not follow the normal dis-
tribution. Why?

c. Why can we use the normal distribution in obtaining an answer to part (a)?

d. For what value of ω can we say that P (µ − ω < X̄ < µ + ω) is equal to 80%?

e. Let T be the total overstatement for the 400 randomly selected items. Find the number b so
that P (T > b) = 0.975.

Example 7

A telephone company has determined that during nonholidays the number of phone calls that pass
through the main branch office each hour follows the normal distribution with mean µ = 80000 and
standard deviation σ = 35000. Suppose that a random sample of 60 nonholiday hours is selected
and the sample mean x̄ of the incoming phone calls is computed.

a. Describe the distribution of x̄.

b. Find the probability that the sample mean x̄ of the incoming phone calls for these 60 hours
is larger than 91970.

c. Is it more likely that the sample average x̄ will be greater than 75000 hours, or that one
hour’s incoming calls will be?

Example 8

Assume that the daily S&P return follows the normal distribution with mean µ = 0.00032 and
standard deviation σ = 0.00859.

a. Find the 75th percentile of this distribution.

b. What is the probability that in 2 of the following 5 days, the daily S&P return will be larger
than 0.01?

c. Consider the sample average S&P of a random sample of 20 days.

i. What is the distribution of the sample mean?

ii. What is the probability that the sample mean will be larger than 0.005?
iii. Is it more likely that the sample average S&P will be greater than 0.007, or that one
day’s S&P return will be?

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 Distribution of the sample mean - Sampling from normal distribution

If we sample from normal distribution N (µ, σ) then X̄ follows exactly the normal distribution with
mean µ and standard deviation √σ n regardless of the sample size n. In the next figure we see the
effect of the sample size on the shape of the distribution of X̄ . The first figure is the N (5, 2)
distribution. The second figure represents the distribution of X̄ when n = 4. The second figure
represents the distribution of X̄ when n = 16.

N5 2
0.0 0.2 0.4 0.6 0.8
fx

−3 −1 1 3 5 7 9 11 13

2
N5 
4
0.0 0.2 0.4 0.6 0.8
fx

1 2 3 4 5 6 7 8 9

2
N5 
 16
0.0 0.2 0.4 0.6 0.8
fx

3 4 5 6 7

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 Central limit theorem - More problems

Problem 1
Part A:

It is claimed that the histogram below shows the distribution of the sample mean x̄, when repeated
samples of size n = 36 are selected with replacement from the population (2.6, 2.8, 3.0, 3.2, 3.4).
Clearly explain if there is anything wrong with this histogram.

Part B:

a. What distribution does the sum (total) of 36 observations selected from the same population
as above follow?

b. Sketch the histogram (roughly) of the total of repeated samples (with repcalcement) of size
36 selected from the above population. Make sure that you mark off some important values
on the horizontal axis.

c. Find the 5th percentile of the distribution of T .

.2

.15

.1

.05

0
2.6 2.8 3 3.2 3.4
xbar

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Problem 2

A random sample of size n = 100 is selected form a distribution with mean µ = 16 and standard
deviation σ = 4. Which one of the graphs below represents the distribution of the sample mean.
Please explain your answer.

(a)

0.0 0.1 0.2 0.3 0.4

fx

13 14 15 16 17 18 19

(b)
4
3
fx

2
1
0

15.7 15.8 15.9 16.0 16.1 16.2 16.3

(c)
0.8
fx

0.4
0.0

15.0 15.5 16.0 16.5 17.0

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Problem 3

Below you see the probability density function of an exponential distribution with parameter λ = 21 .
It is claimed that the second graph is the distribution of the total T when a sample of size n = 100
is selected. Is there anything wrong with this graph?

1
X ~ exp  
2
0.5
0.4
0.3
f(x)

0.2
0.1
0.0

0 2 4 6 8 10

Distribution of T
0.04
0.03
0.02
f(T)

0.01
0.00

170 175 180 185 190 195 200 205 210 215 220 225 230

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 The distribution of the sample mean and the central limit theorem
An empirical investigation

The central limit theorem states that if a large sample of size n is selected from a population that
hasm mean µ and standard deviation σ then the sample mean X̄ follows approximately:
¯ σ

X ∼ N (µ, √ )
n
In this experiment we will roll a die n = 80 times. Using the 80 outcomes we will compute the
sample mean. We will repeat until we obtain 500 values of x̄. At the end we will construct the
histogram using the values of x̄. Here is the population:
X P (X)
1
1 6
2 1
6
3 1
6
1
4 6
5 1
6
1
6 6
This population has µ = 3.5 and σ = 1.71. Why?

The summary statistics of the 500 sample means:

. summarize xbar

Variable | Obs Mean Std. Dev. Min Max

-------------+-----------------------------------------------------
xbar | 500 3.499725 .1822218 3.025 4

And below you can see the histogram of these 500 sample means: