E370

Week 05
Part 3:
Making New
Variables by Adding
Old Variables
Univariate Random Variables
Those we measure or count from raw
data

Multivariate Random
Variables
We COULD measure and/or count these,
but we can also get them by adding
Univariate Random Variables, also
called combinations.

Where do random variables come from?

LINEAR

What does that mean? A variable can

have a constant added to or subtracted from it,
be multiplied or divided by a constant,
be added to or subtracted from another variable,
or any combination of the above.
If the formula for the new variable contains
functions such as square roots or logarithms, then
the combination is not linear.
Forexample, if Y = 3X1 + 2X2 then Y is a
linear combination of the variables X 1 and
X2.

What is the most common

combination method?
Ifwe add random
variables then the new
variable is also random.
o That means it must have a
distribution.
o That means it must have
expected values.

New Random Variables

 Original
Original
data times
data plus c
Statistic c
Changes . .
Changes . .
.
.
Mean +c c*
Median MED + c c*MED
Mode Mode + c c*Mode
Range No Change c*Range
Variance No Change c2*2
St. Deviation No Change |c|*

Summary
 The president of Midwest Foods is
thinking of building a meat
distribution facility on the outskirts
of Chicago. Contribution per pound
to profits is known to be $0.40 for
pork and $0.50 for beef. The
president is interested in overall
profits. Define a relevant random
variable.

TP = 0.4*P + 0.5*B
A practical problem
 Itis known that expected pork
sales per month are 2300 pounds.
Expected beef sales per month
are 4200. Calculate the expected
value of profits.
E(TP) = E(0.4P + 0.5B)
= E(0.4P) + E(0.5B)
= 0.4*E(P) + 0.5*E(B)
= 0.4*2300 + 0.5*4200
= 920 + 2100 = $3,020

Expected Value
The expected value of the sum
of random variables is the sum
of the expected values of its
parts.
For S= aX + bY + c
E(S) =E(aX + bY + c)
=E(aX) + E(bY) + (E(c))
=a*E(X) + b*E(Y) + c
(E(c) = c)

Big News
 Theexpected standard deviation
of pork sales is1187 pounds; the
expected standard deviation of
beef sales is 1400 pounds.
Calculate the expected standard
deviation of profits, assuming
pork and beef sales are
independent of one another.
o Calculate Variance
o Take Square Root of it.

Independent
Expected Standard Deviation
V(TP) = V(0.4*P + 0.5*B)

=V(0.4*P) + V(0.5*B)

=(0.4)2 *V(P) + (0.5)2 *V(B)

=(0.16) *(1408969) + (0.25) * (1960000)

=225435.04 + 490000 = 715435.04

Thus,
the standard deviation is
=SQRT(715435.04) = $845.83

Variance Calculations
The expected variance of the
sum of random variables is the
sum of the expected variances
of its parts . . .
For S= aX + bY + c
V(S) = V(aX + bY + c)
=V(aX) + V(bY) + V(c)
=a2*V(X) + b2*V(Y) + 0
V(c) = 0
(. . . plus the expected covariances of its
variable pairs.)
More Big News
 The covariance between pork and beef sales
is 1,160,000. Calculate the expected
standard deviation of profits that includes this
information.
Must include the variation from between the
variables: 2*a*b*pb = 2*(0.4)*(0.5)*(1160000)
= 64,000
715435.04 + (64,000) = 651435.04
Thus, the standard deviation is
=SQRT(651435.04) = $807.12

Dependent
Expected Standard Deviation
Expected Values of
Sums of 2 Random Variables

E(aX+bY)=aE(X) + bE(Y) = ax +
by

V(aX+bY)=a2V(X) + b2V(Y) +
2abCOV(X,Y)
= a22x + b22y +2abxy

Expected Values Summary

Expected Values of
Sums of 3 Random Variables
E(aX+bY+cZ)=aE(X) + bE(Y) +
cE(Z)
= ax + by + cz
V(aX+bY+cZ)=a2V(X)+b2V(Y)
+c2V(Z)
+2abCOV(X,Y)+2bcCOV(Y,Z)
+2caCOV(Z,X)
Expected 2 2 Values
= a +b +c
2 2 2 2 Summary
x y z