..

.. .
SLIDES BY
. John Loucks
..
.. St. Edward’s
.. University

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 Chapter 5
Discrete Probability Distributions
 Random Variables
 Discrete Probability Distributions
 Expected Value and Variance
 Bivariate Distributions, Covariance,
and Financial Portfolios
 Binomial Probability .40

Distribution .30

 Poisson Probability .20

Distribution .10

 Hypergeometric Probability
0 1 2 3 4
Distribution
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 Random Variables

A random variable is a numerical description of the

outcome of an experiment.

A discrete random variable may assume either a

finite number of values or an infinite sequence of
values.

A continuous random variable may assume any

numerical value in an interval or collection of
intervals.

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 Discrete Random Variable
with a Finite Number of Values
 Example: JSL Appliances

Let x = number of TVs sold at the store in one day,

where x can take on 5 values (0, 1, 2, 3, 4)

We can count the TVs sold, and there is a finite

upper limit on the number that might be sold (which
is the number of TVs in stock).

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 Discrete Random Variable
with an Infinite Sequence of Values
 Example: JSL Appliances

Let x = number of customers arriving in one day,

where x can take on the values 0, 1, 2, . . .

We can count the customers arriving, but there is

no finite upper limit on the number that might arrive.

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 Random Variables

Question Random Variable x Type

Family x = Number of dependents Discrete

size reported on tax return

Distance from x = Distance in miles from Continuous

home to store home to the store site
Own dog x = 1 if own no pet; Discrete
or cat = 2 if own dog(s) only;
= 3 if own cat(s) only;
= 4 if own dog(s) and cat(s)

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 Discrete Probability Distributions

The probability distribution for a random variable

describes how probabilities are distributed over
the values of the random variable.

We can describe a discrete probability distribution

with a table, graph, or formula.

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 Discrete Probability Distributions

Two types of discrete probability distributions will

be introduced.

First type: uses the rules of assigning probabilities

to experimental outcomes to determine probabilities
for each value of the random variable.

Second type: uses a special mathematical formula

to compute the probabilities for each value of the
random variable.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discrete Probability Distributions

The probability distribution is defined by a

probability function, denoted by f(x), that provides
the probability for each value of the random variable.

The required conditions for a discrete probability

function are:
f(x) > 0

f(x) = 1

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 Discrete Probability Distributions

There are three methods for assign probabilities to

random variables: the classical method, the subjective
method, and the relative frequency method.

The use of the relative frequency method to develop

discrete probability distributions leads to what is
called an empirical discrete distribution.
example
on next
slide

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 Discrete Probability Distributions
 Example: JSL Appliances
• Using past data on TV sales, …
• a tabular representation of the probability
distribution for TV sales was developed.
Number 80/200
Units Sold of Days x f(x)
0 80 0 .40
1 50 1 .25
2 40 2 .20
3 10 3 .05
4 20 4 .10
200 1.00
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 Discrete Probability Distributions
 Example: JSL Appliances
Graphical
representation
.50
of probability
.40 distribution
Probability

.30
.20
.10

0 1 2 3 4
Values of Random Variable x (TV sales)

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discrete Probability Distributions

In addition to tables and graphs, a formula that

gives the probability function, f(x), for every value
of x is often used to describe the probability
distributions.

Several discrete probability distributions specified

by formulas are the discrete-uniform, binomial,
Poisson, and hypergeometric distributions.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discrete Uniform Probability Distribution

The discrete uniform probability distribution is the

simplest example of a discrete probability
distribution given by a formula.

The discrete uniform probability function is

f(x) = 1/n the values of the

random variable
are equally likely
where:
n = the number of values the random
variable may assume

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Expected Value

The expected value, or mean, of a random variable

is a measure of its central location.
E(x) =  = xf(x)

The expected value is a weighted average of the

values the random variable may assume. The
weights are the probabilities.

The expected value does not have to be a value the

random variable can assume.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Variance and Standard Deviation

The variance summarizes the variability in the

values of a random variable.

Var(x) =  2 = (x - )2f(x)

The variance is a weighted average of the squared

deviations of a random variable from its mean.
The weights are the probabilities.

The standard deviation, , is defined as the

positive square root of the variance.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Expected Value
 Example: JSL Appliances

x f(x) xf(x)
0 .40 .00
1 .25 .25
2 .20 .40
3 .05 .15
4 .10 .40
E(x) = 1.20

expected number of
TVs sold in a day
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Variance
 Example: JSL Appliances

x x- (x - )2 f(x) (x - )2f(x)

0 -1.2 1.44 .40 .576
1 -0.2 0.04 .25 .010
2 0.8 0.64 .20 .128
3 1.8 3.24 .05 .162 TVs
4 2.8 7.84 .10 .784 squared
Variance of daily sales = s 2 = 1.660
Standard deviation of daily sales = 1.2884 TVs

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Bivariate Distributions

A probability distribution involving two random

variables is called a bivariate probability distribution.

Each outcome of a bivariate experiment consists of

two values, one for each random variable.
Example: rolling a pair of dice

When dealing with bivariate probability distributions,

we are often interested in the relationship between
the random variables.

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 A Bivariate Discrete Probability Distribution

A company asked 200 of its employees how they

rated their benefit package and job satisfaction. The
crosstabulation below shows the ratings data.

Benefits Job Satisfaction (y)

Package (x) 1 2 3 Total
1 28 26 4 58
2 22 42 34 98
3 2 10 32 44

Total 52 78 70 200

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 A Bivariate Discrete Probability Distribution

The bivariate empirical discrete probabilities for

benefits rating and job satisfaction are shown below.

Benefits Job Satisfaction (y)

Package (x) 1 2 3 Total
1 .14 .13 .02 .29
2 .11 .21 .17 .49
3 .01 .05 .16 .22
Total .26 .39 .35 1.00

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 A Bivariate Discrete Probability Distribution
 Expected Value and Variance for Benefits Package, x

x f(x) xf(x) x - E(x) (x - E(x))2 (x - E(x))2f(x)

1 0.29 0.29 -0.93 0.8649 0.250821

2 0.49 0.98 0.07 0.0049 0.002401

3 0.22 0.66 1.07 1.1449 0.251878

E(x) = 1.93 Var(x) = 0.505100

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 A Bivariate Discrete Probability Distribution
 Expected Value and Variance for Job Satisfaction, y

y f(y) yf(y) y - E(y) (y - E(y))2 (y - E(y))2f(y)

1 0.26 0.26 -1.09 1.1881 0.308906

2 0.39 0.78 -0.09 0.0081 0.003159

3 0.35 1.05 0.91 0.8281 0.289835

E(y) = 2.09 Var(y) = 0.601900

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 A Bivariate Discrete Probability Distribution
 Expected Value and Variance for S = X+Y.

s f(s) s*f(s) s - E(s) (s - E(s))2 (s - E(s))2f(s)

2 0.14 0.28 -2.02 4.0804 0.571256

3 0.24 0.72 -1.02 1.0404 0.249696

4 0.24 0.96 -0.02 0.0004 0.000096

5 0.22 1.1 0.98 0.9604 0.211288

6 0.16 0.96 1.98 3.9204 0.627264

E(s)=4.02 Var(s) =1.6596

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 A Bivariate Discrete Probability Distribution
 Covariance for Random Variables x and y

Varxy = [Var(x + y) – Var(x) – Var(y)]/2

Varxy = [1.6596 – 0.5051 – 0.6019]/2 = 0.2763

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 A Bivariate Discrete Probability Distribution
 Correlation Between Variables x and y
 xy
 xy 
 x y

x  0.5051  0.7107038

 y  0.6019  0.7758221

0.276776
𝜌 𝑥𝑦 = =0.501106
0.7107038 ∗0.775822

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution
 Four Properties of a Binomial Experiment

1. The experiment consists of a sequence of n

identical trials.

2. Two outcomes, success and failure, are possible

on each trial.

3. The probability of a success, denoted by p, does

not change from trial to trial.
stationarity
4. The trials are independent. assumption

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution

Our interest is in the number of successes

occurring in the n trials.

We let x denote the number of successes

occurring in the n trials.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution
 Binomial Probability Function
n!
f (x)  p x (1  p )( n  x )
x !(n  x )!

where:
x = the number of successes
p = the probability of a success on one trial
n = the number of trials
f(x) = the probability of x successes in n trials
n! = n(n – 1)(n – 2) ….. (2)(1)

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution
 Binomial Probability Function
n!
f (x)  p x (1  p )( n  x )
x !(n  x )!

Probability of a particular
Number of experimental
sequence of trial outcomes
outcomes providing exactly
with x successes in n trials
x successes in n trials

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 Binomial Probability Distribution
 Example: Evans Electronics
Evans Electronics is concerned about a low
retention rate for its employees. In recent years,
management has seen a turnover of 10% of the
hourly employees annually.
Thus, for any hourly employee chosen at random,
management estimates a probability of 0.1 that the
person will not be with the company next year.
Choosing 3 hourly employees at random, what is
the probability that 1 of them will leave the company
this year?
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 Binomial Probability Distribution
 Example: Evans Electronics
The probability of the first employee leaving and the
second and third employees staying, denoted (S, F, F),
is given by
p(1 – p)(1 – p)

With a .10 probability of an employee leaving on any

one trial, the probability of an employee leaving on
the first trial and not on the second and third trials is
given by
(.10)(.90)(.90) = (.10)(.90)2 = .081

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 Binomial Probability Distribution
 Example: Evans Electronics
Two other experimental outcomes also result in one
success and two failures. The probabilities for all
three experimental outcomes involving one success
follow.

Experimental Probability of
Outcome Experimental Outcome
(S, F, F) p(1 – p)(1 – p) = (.1)(.9)(.9) = .081
(F, S, F) (1 – p)p(1 – p) = (.9)(.1)(.9) = .081
(F, F, S) (1 – p)(1 – p)p = (.9)(.9)(.1) = .081
Total = .243

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 Binomial Probability Distribution
 Example: Evans Electronics
Using the
Let: p = .10, n = 3, x = 1 probability
function
n!
f ( x)  p x (1  p ) (n  x )
x !( n  x )!
3!
f (1)  (0.1)1 (0.9)2  3(.1)(.81)  .243
1!(3  1)!

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 Binomial Probability Distribution
Using a tree diagram
 Example: Evans Electronics
1st Worker 2nd Worker 3rd Worker x Prob.
L (.1) 3 .0010
Leaves (.1)
S (.9) 2 .0090
Leaves
(.1) L (.1) 2 .0090
Stays (.9)
S (.9) 1 .0810
L (.1) 2 .0090
Leaves (.1)
Stays S (.9) 1 .0810
(.9) L (.1)
1 .0810
Stays (.9)
S (.9) 0 .7290
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 Binomial Probabilities
and Cumulative Probabilities
Statisticians have developed tables that give
probabilities and cumulative probabilities for a
binomial random variable.

These tables can be found in some statistics

textbooks.

With modern calculators and the capability of

statistical software packages, such tables are
almost unnecessary.

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 Binomial Probability Distribution

 Using Tables of Binomial Probabilities

p
n x .05 .10 .15 .20 .25 .30 .35 .40 .45 .50
3 0 .8574 .7290 .6141 .5120 .4219 .3430 .2746 .2160 .1664 .1250
1 .1354 .2430 .3251 .3840 .4219 .4410 .4436 .4320 .4084 .3750
2 .0071 .0270 .0574 .0960 .1406 .1890 .2389 .2880 .3341 .3750
3 .0001 .0010 .0034 .0080 .0156 .0270 .0429 .0640 .0911 .1250

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 Binomial Probability Distribution
 Expected Value

E(x) =  = np
 Variance

Var(x) =  2 = np(1 - p)

 Standard Deviation

  np(1  p )

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 Binomial Probability Distribution
 Example: Evans Electronics
• Expected Value
E(x) = np = 3(.1) = .3 employees out of 3

• Variance
Var(x) = np(1 – p) = 3(.1)(.9) = .27

• Standard Deviation
  3(.1)(.9)  .52 employees

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 Poisson Probability Distribution

A Poisson distributed random variable is often

useful in estimating the number of occurrences
over a specified interval of time or space

It is a discrete random variable that may assume

an infinite sequence of values (x = 0, 1, 2, . . . ).

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Poisson Probability Distribution

Examples of Poisson distributed random variables:

the number of knotholes in 14 linear feet of

pine board

the number of vehicles arriving at a toll

booth in one hour

Bell Labs used the Poisson distribution to model

the arrival of phone calls.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Poisson Probability Distribution
 Two Properties of a Poisson Experiment

1. The probability of an occurrence is the same

for any two intervals of equal length.

2. The occurrence or nonoccurrence in any

interval is independent of the occurrence or
nonoccurrence in any other interval.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Poisson Probability Distribution
 Poisson Probability Function

 x e
f ( x) 
x!

where:
x = the number of occurrences in an interval
f(x) = the probability of x occurrences in an interval
 = mean number of occurrences in an interval
e = 2.71828
x! = x(x – 1)(x – 2) . . . (2)(1)

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 Poisson Probability Distribution
 Poisson Probability Function

Since there is no stated upper limit for the number

of occurrences, the probability function f(x) is
applicable for values x = 0, 1, 2, … without limit.

In practical applications, x will eventually become

large enough so that f(x) is approximately zero
and the probability of any larger values of x
becomes negligible.

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 Poisson Probability Distribution
 Example: Mercy Hospital
Patients arrive at the emergency room of Mercy
Hospital at the average rate of 6 per hour on
weekend evenings.
What is the probability of 4 arrivals in 30 minutes
on a weekend evening?

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Poisson Probability Distribution
Using the
 Example: Mercy Hospital
probability
function
 = 6/hour = 3/half-hour, x = 4
3 4 (2.71828)3
f (4)   .1680
4!

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Poisson Probability Distribution
 Example: Mercy Hospital

Poisson Probabilities
0.25

0.20
Probability

0.15
Actually,
the sequence
0.10 continues:
11, 12, 13 …
0.05

0.00
0 1 2 3 4 5 6 7 8 9 10
Number of Arrivals in 30 Minutes

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Poisson Probability Distribution

A property of the Poisson distribution is that

the mean and variance are equal.
m=s2

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 Poisson Probability Distribution
 Example: Mercy Hospital
Variance for Number of Arrivals
During 30-Minute Periods

m=s2=3

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Hypergeometric Probability Distribution

The hypergeometric distribution is closely related

to the binomial distribution.

However, for the hypergeometric distribution:

the trials are not independent, and

the probability of success changes from trial

to trial.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Hypergeometric Probability Distribution
 Hypergeometric Probability Function

 r  N  r 
  
 x  n  x 
f ( x) 
N
 
n
where: x = number of successes
n = number of trials
f(x) = probability of x successes in n trials
N = number of elements in the population
r = number of elements in the population
labeled success
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 Hypergeometric Probability Distribution
 Hypergeometric Probability Function

r N r
x nx
   
f (x)  for 0 < x < r
N
n number of ways
  n – x failures can be selected
number of ways from a total of N – r failures
x successes can be selected in the population
from a total of r successes
in the population number of ways
n elements can be selected
from a population of size N

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 Hypergeometric Probability Distribution
 Hypergeometric Probability Function

The probability function f(x) on the previous slide

is usually applicable for values of x = 0, 1, 2, … n.

However, only values of x where: 1) x < r and

2) n – x < N – r are valid.

If these two conditions do not hold for a value of

x, the corresponding f(x) equals 0.

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 Hypergeometric Probability Distribution
 Example: Neveready’s Batteries
Bob Neveready has removed two dead batteries
from a flashlight and inadvertently mingled them
with the two good batteries he intended as
replacements. The four batteries look identical.
Bob now randomly selects two of the four
batteries. What is the probability he selects the two
good batteries?

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 Hypergeometric Probability Distribution
 Example: Neveready’s Batteries Using the
probability
function
 r  N  r   2  2   2!  2! 
 x  n  x   2  0   2!0!  0!2! 
f ( x )              1  .167
N  4  4!  6
n 2  2!2! 
     

where:
x = 2 = number of good batteries selected
n = 2 = number of batteries selected
N = 4 = number of batteries in total
r = 2 = number of good batteries in total

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 Hypergeometric Probability Distribution
 Mean

 r 
E ( x)    n  
N

 Variance

 r  r  N  n 
Var ( x)    n  1  
2

 N  N  N  1 

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 Hypergeometric Probability Distribution
 Example: Neveready’s Batteries
• Mean

 r  2
  n   2   1
N 4

• Variance

 2  2  4  2  1
  2  1  
2
   .333
 4  4  4  1  3

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 Hypergeometric Probability Distribution

Consider a hypergeometric distribution with n trials

and let p = (r/n) denote the probability of a success
on the first trial.

If the population size is large, the term

(N – n)/(N – 1) approaches 1.

The expected value and variance can be written

E(x) = np and Var(x) = np(1 – p).

Note that these are the expressions for the expected

value and variance of a binomial distribution.

continued
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 Hypergeometric Probability Distribution

When the population size is large, a hypergeometric

distribution can be approximated by a binomial
distribution with n trials and a probability of
success p = (r/N).

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 End of Chapter 5

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