where
f(x) = value of the density function at any x value
a = minimum value of x
b = maximum value of x
(continued)
f(x) =
Ch. 512
Properties of the
Uniform Distribution
The mean of a uniform distribution is
The variance is
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
2
b a
+
=
12
a)  (b
2
2
=
Ch. 513
Uniform Distribution Example
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Example: Uniform probability distribution
over the range 2 x 6:
2 6
.25
f(x) = = .25 for 2 x 6
6  2
1
x
f(x)
4
2
6 2
2
b a
=
+
=
+
=
1.333
12
2)  (6
12
a)  (b
2 2
2
= = =
Ch. 514
Expectations for Continuous
Random Variables
The mean of X, denoted
X
, is defined as the
expected value of X
The variance of X, denoted
X
2
, is defined as the
expectation of the squared deviation, (X 
X
)
2
, of a
random variable from its mean
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
E(X)
X
=
] ) E[(X
2
X
2
X
=
Ch. 515
5.2
Linear Functions of Variables
Let W = a + bX , where X has mean
X
and
variance
X
2
, and a and b are constants
Then the mean of W is
the variance is
the standard deviation of W is
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
X W
b a bX) E(a + = + =
2
X
2 2
W
b bX) Var(a = + =
X W
b =
Ch. 516
Linear Functions of Variables
An important special case of the previous results is the
standardized random variable
which has a mean 0 and variance 1
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
(continued)
X
X
X
Z
=
Ch. 517
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
The Normal Distribution
Continuous
Probability
Distributions
Probability
Distributions
Uniform
Normal
Exponential
Ch. 518
5.3
Bell Shaped
Symmetrical
Mean, Median and Mode
are Equal
Location is determined by the
mean,
Spread is determined by the
standard deviation,
The random variable has an
infinite theoretical range:
+ to
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Mean
= Median
= Mode
x
f(x)
(continued)
Ch. 519
The Normal Distribution
The normal distribution closely approximates the
probability distributions of a wide range of random
variables
Distributions of sample means approach a normal
distribution given a large sample size
Computations of probabilities are direct and elegant
The normal probability distribution has led to good
business decisions for a number of applications
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
(continued)
Ch. 520
The Normal Distribution
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
By varying the parameters and , we obtain
different normal distributions
Many Normal Distributions
Ch. 521
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
The Normal Distribution Shape
x
f(x)
Changing shifts the
distribution left or right.
Changing increases
or decreases the
spread.
Given the mean and variance we define the normal
distribution using the notation
) N( ~ X
2
,
Ch. 522
The Normal Probability
Density Function
The formula for the normal probability density
function is
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Where e = the mathematical constant approximated by 2.71828
= the mathematical constant approximated by 3.14159
= the population mean
= the population standard deviation
x = any value of the continuous variable, < x <
2 2
/2 ) (x
e
2
1
f(x)
=
o
Ch. 523
Cumulative Normal Distribution
For a normal random variable X with mean and
variance
2
, i.e., X~N(,
2
), the cumulative
distribution function is
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
) x P(X ) F(x
0 0
s =
x
0
x
0
) x P(X
0
s
f(x)
Ch. 524
Finding Normal Probabilities
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
x
b a
The probability for a range of values is
measured by the area under the curve
F(a) F(b) b) X P(a = < <
Ch. 525
Finding Normal Probabilities
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
x
b a
x
b a
x
b a
(continued)
F(a) F(b) b) X P(a = < <
a) P(X F(a) < =
b) P(X F(b) < =
Ch. 526
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
The Standardized Normal
Any normal distribution (with any mean and
variance combination) can be transformed into the
standardized normal distribution (Z), with mean 0
and variance 1
Need to transform X units into Z units by subtracting the
mean of X and dividing by its standard deviation
1) N(0 ~ Z ,
X
Z
=
Z
f(Z)
0
1
Ch. 527
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Example
If X is distributed normally with mean of 100
and standard deviation of 50, the Z value for
X = 200 is
This says that X = 200 is two standard
deviations (2 increments of 50 units) above
the mean of 100.
2.0
50
100 200
X
Z =
=
Ch. 528
Comparing X and Z units
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Z
100
2.0 0
200 X
Note that the distribution is the same, only the
scale has changed. We can express the problem in
original units (X) or in standardized units (Z)
( = 100, = 50)
( = 0 , = 1)
Ch. 529
Finding Normal Probabilities

.

\


.

\

=

.

\

< <
= < <
a
F
b
F
b
Z
a
P b) X P(a
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
a b
x
f(x)
a
Z
0
Ch. 530
Probability as
Area Under the Curve
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
f(X)
X
0.5 0.5
The total area under the curve is 1.0, and the curve is
symmetric, so half is above the mean, half is below
1.0 ) X P( = < <
0.5 ) X P( = < <
0.5 ) X P( = < <
Ch. 531
Appendix Table 1
The Standardized Normal table in the textbook
(Appendix Table 1) shows values of the
cumulative normal distribution function
For a given Zvalue a , the table shows F(a)
(the area under the curve from negative infinity to a )
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Z
0
a
a) P(Z F(a) < =
Ch. 532
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
The Standardized Normal Table
Z
0 2.00
.9772
Example:
P(Z < 2.00) = .9772
Appendix Table 1 gives the probability F(a) for
any value a
Ch. 533
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Z
0 2.00
Example:
P(Z < 2.00) = 1 0.9772
= 0.0228
For negative Zvalues, use the fact that the
distribution is symmetric to find the needed
probability:
Z
0 2.00
.9772
.0228
.9772
.0228
(continued)
Ch. 534
The Standardized Normal Table
General Procedure for Finding
Probabilities
Draw the normal curve for the problem in
terms of X
Translate Xvalues to Zvalues
Use the Cumulative Normal Table
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
To find P(a < X < b) when X is
distributed normally:
Ch. 535
Finding Normal Probabilities
Suppose X is normal with mean 8.0 and
standard deviation 5.0
Find P(X < 8.6)
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
X
8.6
8.0
Ch. 536
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Suppose X is normal with mean 8.0 and
standard deviation 5.0. Find P(X < 8.6)
Z
0.12 0
X
8.6 8
= 8
= 10
= 0
= 1
(continued)
0.12
5.0
8.0 8.6
X
Z =
=
P(X < 8.6) P(Z < 0.12)
Ch. 537
Finding Normal Probabilities
Solution: Finding P(Z < 0.12)
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Z
0.12
z F(z)
.10 .5398
.11
.5438
.12 .5478
.13 .5517
F(0.12) = 0.5478
Standardized Normal Probability
Table (Portion)
0.00
= P(Z < 0.12)
P(X < 8.6)
Ch. 538
Upper Tail Probabilities
Suppose X is normal with mean 8.0 and
standard deviation 5.0.
Now Find P(X > 8.6)
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
X
8.6
8.0
Ch. 539
Upper Tail Probabilities
Now Find P(X > 8.6)
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
(continued)
Z
0.12
0
Z
0.12
0.5478
0
1.000
1.0  0.5478
= 0.4522
P(X > 8.6) = P(Z > 0.12) = 1.0  P(Z 0.12)
= 1.0  0.5478 = 0.4522
Ch. 540
Finding the X value for a
Known Probability
Steps to find the X value for a known
probability:
1. Find the Z value for the known probability
2. Convert to X units using the formula:
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Z X + =
Ch. 541
Finding the X value for a
Known Probability
Example:
Suppose X is normal with mean 8.0 and
standard deviation 5.0.
Now find the X value so that only 20% of all
values are below this X
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
X
? 8.0
.2000
Z
? 0
(continued)
Ch. 542
Find the Z value for
20% in the Lower Tail
20% area in the lower
tail is consistent with a
Z value of 0.84
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Standardized Normal Probability
Table (Portion)
X
? 8.0
.20
Z
0.84 0
1. Find the Z value for the known probability
z F(z)
.82 .7939
.83
.7967
.84 .7995
.85 .8023
.80
Ch. 543
Finding the X value
2. Convert to X units using the formula:
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
80 . 3
0 . 5 ) 84 . 0 ( 0 . 8
Z X
=
+ =
+ =
So 20% of the values from a distribution
with mean 8.0 and standard deviation
5.0 are less than 3.80
Ch. 544
Assessing Normality
Not all continuous random variables are
normally distributed
It is important to evaluate how well the data is
approximated by a normal distribution
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 545
The Normal Probability Plot
Normal probability plot
Arrange data from low to high values
Find cumulative normal probabilities for all values
Examine a plot of the observed values vs. cumulative
probabilities (with the cumulative normal probability
on the vertical axis and the observed data values on
the horizontal axis)
Evaluate the plot for evidence of linearity
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 546
The Normal Probability Plot
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
A normal probability plot for data
from a normal distribution will be
approximately linear:
0
100
Data
Percent
(continued)
Ch. 547
The Normal Probability Plot
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
LeftSkewed RightSkewed
Uniform
0
100
Data
P
e
r
c
e
n
t
(continued)
Nonlinear plots
indicate a deviation
from normality
0
100
Data
P
e
r
c
e
n
t
0
100
Data
P
e
r
c
e
n
t
Ch. 548
Normal Distribution Approximation
for Binomial Distribution
Recall the binomial distribution:
n independent trials
probability of success on any given trial = P
Random variable X:
X
i
=1 if the i
th
trial is success
X
i
=0 if the i
th
trial is failure
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
nP E(X) = =
P) nP(1 Var(X)
2
= =
Ch. 549
5.4
The shape of the binomial distribution is
approximately normal if n is large
The normal is a good approximation to the binomial
when nP(1 P) > 5
Standardize to Z from a binomial distribution:
Normal Distribution Approximation
for Binomial Distribution
P) nP(1
np X
Var(X)
E(X) X
Z
=
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
(continued)
Ch. 550
Normal Distribution Approximation
for Binomial Distribution


.

\

s s
= < <
P) nP(1
nP b
Z
P) nP(1
nP a
P b) X P(a
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Let X be the number of successes from n independent
trials, each with probability of success P.
If nP(1  P) > 5,
(continued)
Ch. 551
Binomial Approximation Example
0.2190 0.2810 0.5000
0.58) F( F(0)
0) Z 0.58 P(
0.4) 200(0.4)(1
80 80
Z
0.4) 200(0.4)(1
80 76
P 80) X P(76
= =
=
< < =


.

\

s s
= < <
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
40% of all voters support ballot proposition A. What
is the probability that between 76 and 80 voters
indicate support in a sample of n = 200 ?
E(X) = = nP = 200(0.40) = 80
Var(X) =
2
= nP(1 P) = 200(0.40)(1 0.40) = 48
( note: nP(1 P) = 48 > 5 )
Ch. 552
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
The Exponential Distribution
Continuous
Probability
Distributions
Probability
Distributions
Normal
Uniform
Exponential
Ch. 553
5.5
The Exponential Distribution
Used to model the length of time between two
occurrences of an event (the time between
arrivals)
Examples:
Time between trucks arriving at an unloading dock
Time between transactions at an ATM Machine
Time between phone calls to the main operator
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 554
The Exponential Distribution
0 t for e f(t)
t
> =
2
,. . .
k
and variances
1
2
,
2
2
,. . .,
k
2
. Then:
If the covariance between every pair of these random
variables is 0, then the variance of their sum is the
sum of their variances
However, if the covariances between pairs of random
variables are not 0, the variance of their sum is
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
2
k
2
2
2
1 k 2 1
) X X Var(X + + + = + + +
) X , Cov(X 2 ) X X Var(X
j
1 K
1 i
K
1 i j
i
2
k
2
2
2
1 k 2 1
= + =
+ + + + = + + +
(continued)
Ch. 563
Differences Between Two
Random Variables
For two random variables, X and Y
The mean of their difference is the difference of their
means; that is
If the covariance between X and Y is 0, then the
variance of their difference is
If the covariance between X and Y is not 0, then the
variance of their difference is
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Y X
Y) E(X =
2
Y
2
X
Y) Var(X + =
Y) 2Cov(X, Y) Var(X
2
Y
2
X
+ =
Ch. 564
Linear Combinations of
Random Variables
A linear combination of two random variables, X and Y,
(where a and b are constants) is
The mean of W is
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
bY aX W + =
Y X W
b a bY] E[aX E[W] + = + = =
Ch. 565
Linear Combinations of
Random Variables
The variance of W is
Or using the correlation,
If both X and Y are joint normally distributed random
variables then the linear combination, W, is also
normally distributed
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Y) 2abCov(X, b a
2
Y
2 2
X
2 2
W
+ + =
Y X
2
Y
2 2
X
2 2
W
Y) 2abCorr(X, b a + + =
(continued)
Ch. 566
Example
Two tasks must be performed by the same worker.
X = minutes to complete task 1;
x
= 20,
x
= 5
Y = minutes to complete task 2;
y
= 20,
y
= 5
X and Y are normally distributed and independent
What is the mean and standard deviation of the time to
complete both tasks?
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 567
Example
X = minutes to complete task 1;
x
= 20,
x
= 5
Y = minutes to complete task 2;
y
= 30,
y
= 8
What are the mean and standard deviation for the time to complete
both tasks?
Since X and Y are independent, Cov(X,Y) = 0, so
The standard deviation is
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
(continued)
Y X W + =
50 30 20
Y X W
= + = + =
89 (8) (5) Y) 2Cov(X,
2 2 2
Y
2
X
2
W
= + = + + =
9.434 89
W
= =
Ch. 568
Portfolio Analysis
A financial portfolio can be viewed as a linear
combination of separate financial instruments
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 569


.

\




.

\

+


.

\




.

\

+


.

\




.

\

=


.

\

return
N Stock
N stock in
value portfolio
of Proportion
return
2 Stock
stock2 in
value portfolio
of Proportion
return
1 Stock
stock1 in
value portfolio
of Proportion
portfolio
on Return
=
Chapter Summary
Defined continuous random variables
Presented key continuous probability distributions and
their properties
uniform, normal, exponential
Found probabilities using formulas and tables
Interpreted normal probability plots
Examined when to apply different distributions
Applied the normal approximation to the binomial
distribution
Reviewed properties of jointly distributed continuous
random variables
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 573
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