Random Variable
Representsa possible numerical value from an
uncertain event
Random
Variables
Discrete Continuous
Random Variable Random Variable
Discrete Random Variables
Examples:
X Value Probability
Experiment:
0
Toss 2 Coins.
1/4 = 0.25
Let X = # heads.
4 possible
1 outcomes
2/4 = 0.50 Probability Distribution
T2 T
1/4 = 0.25
T H
H T
Probability
0.50
H H 0.25
0 1 2 X
Discrete Random Variable
Summary Measures
X P(X)
Example: Toss 2 coins, 0 0.25
X = # of heads, 1 0.50
compute expected value of X: 2 0.25
E(X) = (0 x 0.25) + (1 x 0.50) + (2 x 0.25)
= 1.0
Discrete Random Variable
Summary Measures
(continued)
Variance of a discrete random variable
N
σ 2 = ∑ [Xi − E(X)]2 P(Xi )
i=1
N
σ = σ2 = ∑ i
[X
i=1
− E(X)]2
P(Xi )
where:
E(X) = Expected value of the discrete random variable X
Xi = the ith outcome of X
P(Xi) = Probability of the ith occurrence of X
Discrete Random Variable
Summary Measures
(continued)
Example: Toss 2 coins, X = # heads,
compute standard deviation (recall E(X) = 1)
σ= ∑ [X − E(X)] P(X )
i
2
i
Investment
P(XiYi) Economic condition Passive Fund X Aggressive Fund Y
0.2 Recession - $ 25 - $200
0.5 Stable Economy + 50 + 60
0.3 Expanding Economy + 100 + 350
Investment
P(XiYi) Economic condition Passive Fund X Aggressive Fund Y
0.2 Recession - $ 25 - $200
0.5 Stable Economy + 50 + 60
0.3 Expanding Economy + 100 + 350
Discrete Continuous
Probability Probability
Distributions Distributions
Binomial Normal
Poisson Uniform
Hypergeometric Exponential
The Binomial Distribution
Probability
Distributions
Discrete
Probability
Distributions
Binomial
Hypergeometric
Poisson
Binomial Probability Distribution
n! X n−X
P(X) = p (1-p)
X ! (n − X)!
.6
P(X) n = 5 p = 0.5
Here, n = 5 and p = 0.5
.4
.2
0 X
0 1 2 3 4 5
Binomial Distribution Characteristics
Mean
μ = E(x) = np
Variance and Standard Deviation
σ = np(1 - p)
2
σ = np(1 - p)
Where n = sample size
p = probability of success
(1 – p) = probability of failure
Binomial Characteristics
Examples
μ = np = (5)(0.1) = 0.5
Mean P(X) n = 5 p = 0.1
.6
.4
σ = np(1- p) = (5)(0.1)(1− 0.1) .2
= 0.6708 0 X
0 1 2 3 4 5
n = 10
x … p=.20 p=.25 p=.30 p=.35 p=.40 p=.45 p=.50
0 … 0.1074 0.0563 0.0282 0.0135 0.0060 0.0025 0.0010 10
1 … 0.2684 0.1877 0.1211 0.0725 0.0403 0.0207 0.0098 9
2 … 0.3020 0.2816 0.2335 0.1757 0.1209 0.0763 0.0439 8
3 … 0.2013 0.2503 0.2668 0.2522 0.2150 0.1665 0.1172 7
4 … 0.0881 0.1460 0.2001 0.2377 0.2508 0.2384 0.2051 6
5 … 0.0264 0.0584 0.1029 0.1536 0.2007 0.2340 0.2461 5
6 … 0.0055 0.0162 0.0368 0.0689 0.1115 0.1596 0.2051 4
7 … 0.0008 0.0031 0.0090 0.0212 0.0425 0.0746 0.1172 3
8 … 0.0001 0.0004 0.0014 0.0043 0.0106 0.0229 0.0439 2
9 … 0.0000 0.0000 0.0001 0.0005 0.0016 0.0042 0.0098 1
10 … 0.0000 0.0000 0.0000 0.0000 0.0001 0.0003 0.0010 0
… p=.80 p=.75 p=.70 p=.65 p=.60 p=.55 p=.50 x
Examples:
n = 10, p = 0.35, x = 3: P(x = 3|n =10, p = 0.35) = 0.2522
n = 10, p = 0.75, x = 2: P(x = 2|n =10, p = 0.75) = 0.0004