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# BUSINESS STATISTICS Session 5: CONCEPT OF RANDOM VARIABLE & PROBABILITY DISTRIBUTIONS

## Post Work 1.1 Learning Objectives

The concept of random variable and probability distribution of random variables is the core of statistical inference. Concept of statistical distributions is very widely applied in managerial decision-making process. This session explains this concept and its application in managerial decision-making. i. Learning Objectives To describe properties of a probability distribution To develop the concept of Mathematical Expectation for a discrete random variable To compute expected value, variance & standard deviation to identify when a random variable will be normally distributed to explain the significance of the standard normal distribution Summary

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Session 4 is extremely important from the point of view of many fascinating aspects of concept of random variable & probability distributions. The session is specifically focused on Distinguishing between discrete and continuous random variables Explaining how a random variable is characterized by its probability distribution Computing statistics about a random variable Computing statistics about a function of a random variable Computing statistics about the sum or a linear composite of a random variable Developing the concept of Mathematical Expectation for a discrete random variable Computing expected value, variance & standard deviation of a discrete random variable Properties of normal distribution Concept of Standard normal distribution Use of normal distribution tables to compute probabilities Transforming a normal distribution into a standard normal distribution Inverse transformation 1.3 Readings Chapter 5 & 6 (Text Book)

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Learning Activities

1) An analyst kept track of the daily price quotation for a given stock. The frequency data led to the following probability distribution of daily stock pricr: Price 17 17.125 17.25 17.375 17.5 17.625 17.75 17.875 18 18.125 18.25 x in dollars P(x) 0.05 0.05 0.10 0.15 0.20 0.15 0.10 0.05 0.05 0.05 0.05 Assume that the stock price is independent from day to day. (a) If 100 shares are bought today at 17.25 & must be sold tomorrow , by prearranged order, what is the expected profit, disregarding the transaction costs? (b) What is the standard deviation of the stock price? How useful is the information? 2) You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a \$1000 investment in each stock has the following probability distribution: Probability 0.1 0.3 0.4 0.2 Stock X - \$50 \$20 \$100 \$150 Stock Y -\$100 \$50 \$130 \$200

Compute the (a) Expected return for stock X & Y (b) Standard deviation for stock X & Y (c) Do you think you will invest in stock X or stock Y? Explain. 3) Returns on investments overseas, especially in Europe & the Pacific Rim, are expected to be higher than those of U. S markets in the near term, & analysts are now recommending investments in international portfolios. An investment consultant believes that the probability distribution of returns (in percent per year) on one such portfolio is as follows: X (%) P(x) 0 0.05 10 0.15 11 0.30 12 0.20 13 0.15 14 0.10 15 0.05

(a) Verify that P(x) is a probability distribution. (b) What is the probability that returns will be at least 12%? (c) Find the cumulative distribution of returns. 4) Returns on a certain business venture , to the nearest \$1000, are known to follow the probability distribution X P(x) -2000 0.1 -1000 0.1 0 0.2 1000 0.2 2000 0.3 3000 0.3

(a) Is the venture likely to be successful? Explain . (b) What is the long term average earning of business venture of this kind? Explain. What is a good measure of risk involved in a venture of this kind? Compute this measure. 5) The mean yield for one acre plot is 662 kilos with a SD of 32 kilos. Assuming normal distribution how many one acre plots in a batch of 1000 plots would you expect to have yield over (a) 700 kilos (b) below 650 kilos and (c) lowest yield of the best 100 plots. 6) A restaurant has three sources of revenue: eat in orders, takeout orders & the bar. The daily revenue from each source is normally distributed with mean & standard deviation shown in the table below Mean Eat in Take out Bar \$5,780 \$641 \$712 Standard Deviation \$142 \$78 \$72

i) What will be the distribution of total revenue on a day? Give reason. ii) What are the mean & standard deviation of the total revenue on a particular day? iii) What is the probability that the revenue will exceed \$7000 0n a particular day? 7) Travelbyus is an internet based travel agency wherein customers can see videos of the cities they plan to visit. The number of hits daily is a normally distributed random variable with a mean of 10,000 and a SD of 2400 (a) What is the probability of getting more than 12,000 hits? (b) What is the probability of getting fewer than 9000 hits? -----------------------------------------------------------------------------------------------------