Business Decision Making Techniques

Module Code: AC213

Topic : Random Variables

by

Ms. Soko

random variables 1
Outline

 Definition of a Random Variable

 Discrete Random Variables
 Continuous Random Variables
 Expectations, Variances
 Binomial Distributions
 Poisson Distribution
 Normal Distributions
 Uniform Distribution
 exponential distribution

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Definition of a Random Variable
 A random variable is a real valued function defined on a sample space
S. In a particular experiment, a random variable X would be some
function that assigns a real number X(s) for each possible outcome s S
 A discrete random variable is a random variable that take a countable
number of values. If we count
 Number of sales per day
 Number of office machines to purchase
 defective screws in a production,
 A continuous random variable can take any value along a given
interval of a number line.
 The time a customer spends in queued at a certain Bank

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Probability Distributions, Mean and Variance for Discrete
Random Variables

 The probability distribution of a discrete random variable is

defined as a function that specifies the probability associated
with each possible outcome the random variable can assume.
 p(x) ≥ 0 for all values of x
 p(x) = 1
 The mean, or expected value, of a discrete random variable is
 = E ( x) =  xp( x).
 The variance of a discrete random variable x is
 2 = E[( x −  )2 ] =  ( x −  )2 p( x).

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Example
The probability mass function of the random
variable X is given by
0 1 2 3 4 5

0.1 0.1 0.3 0.3 0.1 0.1

a) Find the expected value of X and Variance of X.

b) E(2x+4) and Var(7x+5)

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Example 2


random variables 6
 The Binomial Probability

The binomial probability distribution is one of the most widely used discrete probability
distributions. It is applied to find the probability that an outcome will occur x times in n
performances of an experiment.

An experiment that satisfies the following four conditions is called a binomial

experiment.

1. There are n identical trials. In other words, the given experiment is repeated n times,

where n is a positive integer. Each trial has two and only two outcomes. These

outcomes are usually called a success and a failure, respectively.

2. The probability of success is denoted by p and that of failure by q, and p + q = 1. The

probabilities p and q remain constant for each trial.

Conditions of a Binomial Experiment

A binomial experiment must satisfy the following four conditions.

1. There are n identical trials.

2. Each trial has only two possible outcomes.

3. The probabilities of the two outcomes remain constant.

Binomial Formula For a binomial experiment, the probability of exactly x successes in n
4. Theistrials
trials givenare
byindependent
the binomial formula
P( x) = nCx p x qn− x
where
n - x = number of failures in n trials
x = number of successes in n trials
q= 1- p probability of failure
p = probability of success
n = total number of trials
The Binomial Distribution Probability Distribution
The probability of The probability of
The number of getting the
ways of getting getting the
required number required number
the desired of successes
results of failures

 n  x n− x
P ( x) =   p q
 x
 Example: Binomial tree model in option pricing.

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The Binomial Distribution Probability Distribution
 Example 2: Say 40% of the class is female.
What is the probability that 6 of the first 10 students
walking in will be female?

 n  x n− x
P( x) =  xp q
 
10  6 10 − 6
= 6 (.4 )(.6 )
 
= 210(.004096)(.1296)
= .1115

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Example 1
At Cavendish University, management is contemplating on whether to ban drinking in hostels
or not. Suppose 60% of the student body are in favour of management plan to ban drinking in
hostels and 8 students are randomly selected, find the probability that
i. 3 favour the ban
ii. Less than 6 favour the ban
iii.At least 2 favour the ban
Solution
(i) n = 8, p = 0.6, q = 1 − p = 0.4
n
P ( X = x) =   p x (1 − p ) n − x
 x
8
P ( X = 3) =   ( 0.6 ) ( 0.4 )
3 8−3

 3
= 0.1239 .

(ii) P ( X  6 ) = P ( X = 0 ) + P ( X = 1) + P ( X = 2 ) + P ( X = 3) + P ( X = 4 ) + P ( X = 5)
Alternatively, we can use
P ( X  6) = 1 − P ( X  6)

 P ( X = 6 ) + P ( X = 7 ) + P ( X = 8) 
= 1−  
 8  8  8 0
= 1 −   ( 0.6 ) ( 0.4 ) +   ( 0.6 ) ( 0.4 ) +   ( 0.6 ) ( 0.4 ) 
6 2 7 1 8

 6  7 8 
= 1 − 0.3154
= 0.6846
(iii) P ( X  2 ) = P ( X = 2 ) + P ( X = 3) + P ( X = 4 ) + P ( X = 5 ) + P ( X = 6 ) + P ( X = 7 ) + P ( X = 8 )
P ( X  2) = 1 − P ( X  2)

 P ( X = 0 ) + P ( X = 1) 
= 1−  
 8  8 7
= 1 −   ( 0.6 ) ( 0.4 ) +   ( 0.6 ) ( 0.4 ) 
0 8 1

 0  1  
= 0.9915
 Example 2
Of a large number of mass-produced articles, one-tenth is defective. Find the probabilities that a
random sample of 20 will obtain
Solution
(a) Exactly two defective articles;
 1 
Let
(b)X be theAtnumber of defective
least two articles in a random sample of 20.
defective articles. Then X B  20,  . Here
 10 
1
n = 20 and p = .
10

n
(a) P ( X = x ) =   p x (1 − p ) n − x
 x
20 − 2
 20   1   9 
2

=    
 2   10   10 
 20   1   9 
2 18

=    
 2   10   10 
= 0.2852

(b) P ( X  2) = 1 − P ( X  2)
i.e P ( X  2) = 1 − P ( X = 0) − P ( X = 1)
 20   1   9   20   1   9 
0 20 1 19

= 1−      −    
 0   10   10   1   10   10 
= 1 − 0.1216 − 0.2702
= 0.6082
Theorem
The mean and variance of the binomial distribution with parameters of n and p are
Mean: E ( X ) = np
Variance: Var ( X ) = npq , where q = 1 − p

Example 3
A packaging machine produces 20 percent defective packages. A random sample of ten packages
is selected, what are the mean and standard deviation of the binomial distribution of that process?

Solution
Let X be the number of defective packages in a sample of 10 packages. Here n = 10 and p = 0.2 .
X B (10, 0.2 )
Mean = E ( X ) = 10  0.2 = 2
Standard deviation = Var ( X )
= npq
= 10  0.2  0.8
= 1.265