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ADM 2303 Brief Review


• We considered Continuous random variables
STATISTICS FOR • Uniform distribution
• Calculating probabilities

MANAGEMENT I • Expected value, Variance, Standard deviation


• Normal distribution
• Calculating probabilities
• Sketch and identify the area of interest
Week 6 – Continuous Random Variables – • Determine the z-score
Part II • Enter table and determine area
• Translate area into probability of interest

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Example – Normal probability


• If X is a normal random variable with parameters  = 3
and  = 3 find  2 < < 5 .

CONTINUOUS RANDOM
VARIABLES
Chapter 9 (Sections 9.10-9.11, 9.3), Chapter 6

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Normal Probability Plots Non-normal Models


• In practice, we may not know • Normal probability plots for models which are not normally
whether a variable is normally distributed do not follow a straight line – see below:
distributed
• We then consider a special plot Histogram
Normal Q-Q Plot

called a Normal Probability plot

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which will determine whether the

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normal model is appropriate

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• The Normal Probability Plot

Sample Quantiles

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compares the z-scores with the

Frequency
values from the theoretical

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distribution.

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• If the Normal model is appropriate, Copyright © 2014 Pearson Canada Inc.

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then the data falls along a straight

0
0
line – see example 0 1 2 3 4 5 -2 -1 0 1 2

x4 Theoretical Quantiles

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Normal Approximation to Binomial Normal Approximation to Binomial


• In addition to calculating normal probabilities, the Normal • Graphically, with n = 10 and p = 0.5 we have:
model may also be used to approximate probabilities such
as those from the Binomial distribution
• The Normal approximation to binomial holds if
• The expected number of successes and failures sufficiently high
( >  and  − > ) then the Normal model provides an
adequate approximation
• We also need to apply a continuity correction
• Since we are using a continuous distribution (Normal) to approximate a
Discrete distribution (Binomial)

• NOTE: Recall that the Poisson distribution is used to


approximate the Binomial distribution if the expected
number of successes/failures is small ( < 10)

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Normal Approximation to Binomial Continuity Correction


• Graphically, with n = 100 and p = 0.5 we have: • When we use a continuous model to model a set of
discrete events, we may need to make an adjustment
called the continuity correction

• We add or subtract 0.5 as follows:


• ( ≤ ≤ ) ≈ ( − 0.5 ≤ ≤  + 0.5)
•  ≤  ≈ ( ≤  + 0.5)
•  ≥  ≈ ( ≥  − 0.5)

• Then, we calculate z-scores on the corrected values, e.g.


  ≤ ≤  ≈   − 0.5 ≤ ≤  + 0.5
!".#$ %& ($".#$ %&
=   ≤ −  ≤
'& '&

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Example – Advertising Company Exponential Distribution


An advertising company conducted an ad campaign aimed • An exponential model arises in practice to model the
at making consumers in a Western province aware of a distribution of the amount of time until a specific event occurs
new product. Upon completion of the campaign, the agency • For example, we can model the time
• Until the next earthquake, hit to a website
claimed that 20% of consumers in the province had • Until the next car to join a queue
become aware of the product. The product’s distributor • Until the next match between a client and a salesperson
surveyed 1000 consumers in the province and found that
175 were aware of the product. • Note that the Exponential model has a link to the Poisson
model
a) Assuming the ad agency’s claim is true, verify that you
• Note also the parallel between the Exponential model and the
may use the normal approximation to the binomial. geometric model
b) Find the probability that 175 or fewer consumers in a • Geometric model measures the number of trials until the next success
random sample of 1000 consumers would be aware of • Exponential model measures the amount of time until the next
the product. “change”

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Exponential Density Function Family of Exponential PDFs


• The Exponential probability density function (pdf) has a
single parameter denoted λ (λ > 0) and can be expressed

1.0
lambda = 0.5
as: lambda = 1
lambda = 2

1.0
lambda = 5

0.8
$λ* .) + ≥ 0
)* (+) = ,λ-

0.8
0 .) + < 0

0.6
f(x)
0.6
f(x)

0.4
0.4

0.2
0.2

0.0
0 5 10 15 20 0 5 10 15 20
x
x

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Exponential Distribution – Exponential Distribution –


Mean and Variance Calculating Probabilities
• In order to calculate probabilities for an exponential
For the exponential distribution, we have distribution, we have the following formula (referred to as
the Cumulative Distribution Function):
/
Mean:  =
λ 3  = <
(
= 4 λ - $λ* 5+
/ "
Variance: 0 = = 1 − exp −λ
λ1
Where  > 0
Coefficient of variation: ν = 1

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Example – Vibration Test Example – Vibration Test


The failure of a mechanical assembly in a vibration test • Define X = amount of time until the first failure (in hours)
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• ~:+;-<.= λ = = 0.0025
occurs at a rate of 1 failure per 400 hours. Assume that the
number of failures can be modeled as a Poisson random >""
variable.
(a) The expected value and standard deviation are:
a) Find the expected amount of time until a failure and the
/ /
 = = = 400 hours
standard deviation.
λ ".""0#
b) Find the probability that a failure will occur in the next
100 hours.
/ / /
 = = = = 400 hours
λ1 (".""0#)1 ".""0#

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Functions of Dependent Random


Example – Vibration Test Variables
(b) To find the probability that a failure will occur in the next
100 hours, we find • For general random variables X and Y (not necessarily
Normally distributed), if X and Y are dependent, note the
 < 100 = 3 100 = 1 − - $λ /""
following:

= 1 − - $".""0# /""
• The rule for the expected value remains unchanged
• The calculation of the variance is altered
= 1 − - $".0# • We now consider the covariance between the dependent random
= 1 − 0.7788 variables X and Y:

= 0.2212 BC + D = BC + BC D + 2EFB( , D)

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Covariance Correlation – Standardizing Covariance


• The covariance is used to measure how X and Y are • It is convenient to standardize EFB( , D) by adjusting the
associated with each other (since they are dependent) size of the spread of each random variable X and Y
• The standardized measure is called the correlation
coefficient, denoted LH (rho)
• The covariance is denoted EFB( , D) and is defined as:
EFB( , D)
EFB , D = : −  D − H = E XY − E X E(Y) LH =
 H

• Note that LH represents the population correlation, which


is estimated by the sample correlation (denoted C) that will
be discussed in a subsequent class
• Modifying the above equation we may write
EFB , D = LH  H

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Summary:
Interpreting the Correlation Coefficient
Functions of a Single Random Variable
• Note that the correlation coefficient LH is bounded:
• Adding a constant (M)
−1 ≤ LH ≤ 1 • Expected value: : +M =: +M
• Variance: BC + M = BC( )
N(O(!P) N(O()
• The correlation coefficient measures the strength of the • CV: ν= =
Q(!P) Q  !P
linear relationship between X and Y
• If LH > 0 then X and Y are positively linearly correlated
• Multiplying by a constant ():
• If LH < 0 then X and Y are negatively linearly correlated
• Expected value: :  = :( )
• Variance: BC  = 0 BC( )
N(O(() ( N(O()
• CV: ν= = =ν
Q(() (Q()

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Summary: Summary:
Functions of Two Independent Random Variables Functions of Two Dependent Random Variables
• Expected Value • Expected Value

: + D = : + :(D) : + D = : + :(D)
: M + 5D = M: + 5:(D)
: M + 5D = M: + 5:(D)
• Variance • Variance
BC + D = BC + BC(D)
BC  + D = 0 BC +  0 BC(D) BC + D = BC + BC D + 2EFB( , D)

• When X and Y are independent BC  + D = 0 BC +  0 BC D + 2EFB( , D)

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Examples – Functions of Random


Subtraction of Random Variables Variables
• Note that a minus sign is a coefficient • Suppose we have two random variables with the following
mean and standard deviation:
• For instance, if X and Y are dependent, then find the
X Y
standard deviation of  = − D
X 80 12

• Note that  = − D
Y 20 3
can be re-expressed as:
1 + −1 D • First consider X and Y independent random variables.
• Hence using the previous notation,  = 1,  = −1. Then a) Let Z = 0.25X + Y. Find the standard deviation of Z:
we have U = 0.250 0 + H0 = 4.24

BC  = (1)0 BC + (−1)0 BC D + 2 1 −1 COV(X, Y) b) Let Z = X – 0.5Y. Find the standard deviation of Z:
= BC + BC D − 2EFB( , D) U = 0 + (−0. 5)0 H0 = 144 + 9/4 = 12.09

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Examples – Functions of Random Adding and Subtracting Normally


Variables Distributed Random Variables
• How would the answers change if LH = 0.5?
• Recall that only the variance is affected by dependency
• If the random variables X and Y follow a normal
a) Let Z = 0.25X + Y. Find the standard deviation of Z: probability model, i.e. ~[  ,  and Y~[ H , H then
U = 0.250 0 + H0 + 2(0.25)LH  H any linear combination of these random variables will also
follow a normal distribution
144
= + 9 + 2 0.25 0.5 12 (3) = 5.196
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• The expected value of the new random variable is a linear
b) Let Z = X – 0.5Y. Find the standard deviation of Z: combination of the expected values of the random
variables X and Y
U = 0 + (−0. 5)0 H0 +2(1)(−0.5)LH  H
• The variance of the new random variables depends on
9 whether the random variables X and Y are independent
= 144 + − 2 0.5 0.5 12 (3) = 11.32
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Example – International Trade Inverse Problem


In an International Trade class, a professor stated that the • For most probability questions considered to date, we
Exports and Imports during one year of a given country are have the sequence:
estimated to have mean values of 80 B$ and 100 B$ with
standard deviations of 15B$ and 20 B$ respectively. He ⇒  ⇒ ]C- ⇒ C;.=.<^
also stated that the exports as well as imports can both be
considered to follow normal distributions.
• However we can also consider the inverse problem which
follows the reverse sequence:
A trade surplus is defined as exports minus imports.
Calculate the probability that there will be a positive trade
surplus. What assumption do you need to make in this C;.=.<^ ⇒ ]C- ⇒  ⇒
problem?

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Example – Inverse Problem Example - Tires


A company's manufacturing process uses 500 litres of The air pressure in a randomly selected tire installed on a
water at a time. A "scrubbing" machine then removes most new car is normally distributed with mean value of 31 lb/in2
of a chemical pollutant before pumping the water into a and standard deviation 0.5 lb/in2.
nearby lake. To meet federal regulations the treated water
must not contain more than 80 parts per million (ppm) of What pressure +" (in lb/in.2) is exceeded by 90% of the
the chemical. The machine's output can be described by a samples? (i.e. 90% of the samples have an air pressure of
Normal model with a standard deviation 4.2 ppm. more than +" ).

The company's lawyers insist that not more than 2% of the


treated water should be over the limit. In order to achieve
this, to what mean should the company set the scrubbing
machine? Assume the standard deviation does not change.

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Key Concepts
• For continuous random variables there are four main
types of questions:

1. Area Questions: Probability that X lies in some range


 > +/ , ( < +/ ), (+/ < < +0 )
2. Expected value: Uniform, Normal Exponential
3. Variance calculation: Uniform, Normal, Exponential
4. Inverse Problem: Uniform, Normal (using tables), Exponential

• Normal approximation to binomial