IBA- JU

Master of Business Administration

Course Instructor: Dr Swapan Kumar Dhar

Continuous Probability Distribution: The probability distribution of continuous random variable is

continuous probability distribution. If a random variable assumes any numerical value in an interval or
collection of intervals, then it is called a continuous random variable.
Probability Density Function (pdf): To assign the probability of a continuous probability distribution
called pdf is used. If a random variable assumes a continuous set of values
range ( , + ) , then its pdf must satisfy the following conditions:
(i)

f ( x) 0 ;

for all values of x, (ii)

f ( x)dx = 1

x1, x2 ,K , xn

in the

for all values of x.

Condition (i) indicates that a random variable cannot assume negative value and condition (ii) shows
that the probability of the entire range space must equal 1.
In general, the probability of the continuous random variable is determined by finding the area under
the pdf between the values a and b. Mathematically, the area under pdf between a and b is given by
b

f (a x b) = f (b) f (a) = f ( x)dx.

a
Expected value of a continuous random variable: For the continuous random variable, the

expected value is given by

E ( x) = xf ( x)dx .

Example : Under an employment promotion programme, it is proposed to allow sale of newspapers

inside buses during off peak hours. The vendor can purchase newspapers at a special concessional
rate of Taka 7.50 per copy against the selling price of Taka 8.00. Any unsold copies are, however, a
dead loss. A vendor has estimated the following probability distribution for the number of copies
demanded.
Number of Copies
15
16
17
18
19
20
Probability
0.04
0.19
0.33
0.26
0.11
0.07
How many copies should be ordered so that his expected profit will be maximum?
Solution: Profit per copy = Selling price Purchasing price = 8.00 7.50= 0.50 Taka.
Expected profit = Number of copies Probability Profit per copy.
The calculations of expected profit are shown in the following table:
Calculation of Expected Profit
Number of copies demanded
15
16
17
18
19
20

Probability
0.04
0.19
0.33
0.26
0.11
0.07

Profit per copy (in Taka)

0.50
0.50
0.50
0.50
0.50
0.50

Expected profit (in Taka)

30
152
280.50
234
104.50
70

The maximum profit of Taka 280.50 is obtained when he stocks 17 copies of the newspaper.

Example : A bakery has the following schedule of daily demand for cakes. Find the expected number
of cakes demanded per day.
No of cakes demanded
Probability

0
0.02

1
0.07

2
0.09

3
0.12

4
0.20

5
0.20

6
0.18

7
0.10

8
0.01

9
0.01

Solution: Calculating Table for finding expected number of cakes

X = No of cakes
0
1
2
3
4
5
6
7
8
9

Probability = P(x)
0.02
0.07
0.09
0.12
0.20
0.20
0.18
0.10
0.01
0.01

XP(x)
0
0.07
0.18
0.36
0.80
1.00
1.08
0.70
0.08
0.09

xP( x) =4.36. Therefore, the expected number of cakes = 436.

Variance of continuous random variable: The expected value measures the central tendency of a
probability distribution, while variance determines the dispersion or variability to which the possible
random values differ among them.
2
The variance, denoted by Var (x) or X of a random variable X is the squared deviation of the
individual values from their expected value or mean. That is,

Var ( x) = E ( x )2 = E ( x2 2 x + 2 ) = E ( x2 ) 2 ,where
E ( x2 ) = x2 f ( x)dx , for continuous X.

Normal Distribution: The probability density function of a normal distribution is given by

( x )
1
2
2

f ( x) =
e
; < x < +
2

(1) ,

where,
= Constant 3.1416, e =constant 2.7183, = mean of the normal distribution, = standard deviation of
normal distribution.
In symbols, if a random variable X follows normal distribution with mean and variance 2 , then it is also
2 .
expressed as:

X : N ( , )

Standard Normal Distribution: Any normal distribution can be converted into a standard normal
distribution by subtracting the mean from each observation and dividing this difference by the
standard deviation. The results are called Z values. They are also referred to as Z scores, the Z
statistics, the standard normal deviate, the standard normal values or just the normal deviate.
The variable Z is also called standardized normal random variable. So

z =

x .

Where:

x = the value of any particular observation or measurement.

= the mean of the distribution.
= standard deviation of the distribution.

Here Z is normally distributed with mean zero and variance 1. That is Z : N (0,1) .
The Normal Table: The following table is a table of cumulative areas under the standard normal
curve. This table is also called cumulative normal table or Z table. The areas under the normal curve
are given in the body of the table, accurate to four decimal places.

Table: Cumulative Areas under the Standard Normal Curve

z

.00

.01

.02

.03

.04

.05

.06

.07

.08

.09

-3.4

.0003

.0003

.0003

.0003

.0003

.0003

.0003

.0003

.0003

.0002

-3.3

.0005

.0005

.0005

.0004

.0004

.0004

.0004

.0004

.0004

.0003

-3.2

.0007

.0007

.0006

.0006

.0006

.0006

.0006

.0005

.0005

.0005

-3.1

.0010

.0009

.0009

.0009

.0008

.0008

.0008

.0008

.0007

.0007

-3.0

.0013

.0013

.0013

.0012

.0012

.0011

.0011

.0011

.0010

.0010

-2.9

.0019

.0018

.0018

.0017

.0016

.0016

.0015

.0015

.0014

.0014

-2.8

.0026

.0025

.0024

.0023

.0023

.0022

.0021

.0021

.0020

.0019

-2.7

.0035

.0034

.0033

.0032

.0031

.0030

.0029

.0028

.0027

.0026

-2.6

.0047

.0045

.0044

.0043

.0041

.0040

.0039

.0038

.0037

.0036

-2.5

.0062

.0060

.0059

.0057

.0055

.0054

.0052

.0051

.0049

.0048

-2.4

.0082

.0080

.0078

.0075

.0073

.0071

.0069

.0068

.0066

.0064

-2.3

.0107

.0104

.0102

.0099

.0096

.0094

.0091

.0089

.0087

.0084

-2.2

.0139

.0136

.0132

.0129

.0125

.0122

.0119

.0116

.0113

.0110

-2.1

.0179

.0174

.0170

.0166

.0162

.0158

.0154

.0150

.0146

.0143

-2.0

.0228

.0222

.0217

.0212

.0207

.0202

.0197

.0192

.0188

.0183

-1.9

.0287

.0281

.0274

.0268

.0262

.0256

.0250

.0244

.0239

.0233

-1.8

.0359

.0351

.0344

.0336

.0329

.0322

.0314

.0307

.0301

.0294

-1.7

.0446

.0436

.0427

.0418

.0409

.0401

.0392

.0384

.0375

.0367

-1.6

.0548

.0537

.0526

.0516

.0505

.0495

.0485

.0475

.0465

.0455

-1.5

.0668

.0655

.0643

.0630

.0618

.0606

.0594

.0582

.0571

.0559

-1.4

.0808

.0793

.0778

.0764

.0749

.0735

.0721

.0708

.0694

.0681

-1.3

.0968

.0951

.0934

.0918

.0901

.0885

.0869

.0853

.0838

.0823

-1.2

.1151

.1131

.1112

.1093

.1075

.1056

.1038

.1020

.1003

.0985

-1.1

.1357

.1335

.1314

.1292

.1271

.1251

.1230

.1210

.1190

.1170

-1.0

.1587

.1562

.1539

.1515

.1492

.1469

.1446

.1423

.1401

.1379

-0.9

.1841

.1814

.1788

.1762

.1736

.1711

.1685

.4660

.1635

.1611

-0.8

.2119

.2090

.2061

.2033

.2005

.1977

.1949

.1922

.1894

.1867

-0.7

.2420

.2389

.2358

.2327

.2296

.2266

.2236

.2206

.2177

.2148

-0.6

.2743

.2709

.2676

.2643

.2611

.2578

.2546

.2514

.2483

.2451

-0.5

.3085

.3050

.3015

.2981

.2946

.2912

.2877

.2843

.2810

.2776

-0.4

.3446

.3409

.3372

.3336

.3300

.3264

.3228

.3192

.3156

.3121

-0.3

.3821

.3783

.3745

.3707

.3669

.3632

.3594

.3557

.3520

.3483

-0.2

.4207

.4168

.4129

.4090

.4052

.4013

.3974

.3936

.3897

.3859

-0.1

.4602

.4562

.4522

.4483

.4443

.4404

.4364

.4325

.4286

.4247

-0.0

.5000

.4960

.4920

.4880

.4840

.4801

.4761

.4721

.4681

.4641

0.0

.5000

.5040

.5080

.5120

.5160

.5199

.5239

.5279

.5319

.5359

0.1

.5398

.5438

.5478

.5517

.5557

.5596

.5636

.5675

.5714

.5753

0.2

.5793

.5832

.5871

.5910

.5948

.5987

.6026

.6064

.6103

.6141

0.3

.6179

.6217

.6255

.6293

.6331

.6368

.6406

.6443

.6480

.6517

0.4

.6554

.6591

.6628

.6664

.6700

.6736

.6772

.6808

.6844

.6879

0.5

.6915

.6950

.6985

.7019

.7054

.7088

.7123

.7157

.7190

.7224

0.6

.7257

.7291

.7324

.7357

.7389

.7422

.7454

.7486

.7517

.7549

0.7

.7580

.7611

.7642

.7673

.7704

.7734

.7764

.7794

.7823

.7852

0.8

.7881

.7910

.7939

.7967

.7995

.8023

.8051

.8078

.8106

.8133

0.9

.8159

.8186

.8212

.8238

.8264

.8289

.8315

.8340

.8365

.8389

1.0

.8413

.8438

.8461

.8485

.8508

.8531

.8554

.8577

.8599

.8621

1.1

.8643

.8665

.8686

.8708

.8729

.8749

.8770

.8790

.8810

.8830

1.2

.8849

.8869

.8888

.8907

.8925

.8944

.8962

.8980

.8997

.9015

1.3

.9032

.9049

.9066

.9082

.9099

.9115

.9131

.9147

.9162

.9177

1.4

.9192

.9207

.9222

.9236

.9251

.9265

.9279

.9292

.9306

.9319

1.5

.9332

.9345

.9357

.9370

.9382

.9394

.9406

.9418

.9429

.9441

1.6

.9452

.9463

.9474

.9484

.9495

.9505

.9515

.9525

.9535

.9545

1.7

.9554

.9564

.9573

.9582

.9591

.9599

.9608

.9616

.9625

.9633

1.8

.9641

.9649

.9656

.9664

.9671

.9678

.9686

.9693

.9699

.9706

1.9

.9713

.9719

.9726

.9732

.9738

.9744

.9750

.9756

.9761

.9767

2.0

.9772

.9778

.9783

.9788

.9793

.9798

.9803

.9808

.9812

.9817

2.1

.9821

.9826

.9830

.9834

.9838

.9842

.9846

.9850

.9854

.9857

2.2

.9861

.9864

.9868

.9871

.9875

.9878

.9881

.9884

.9887

.9890

2.3

.9893

.9896

.9898

.9901

.9904

.9906

.9909

.9911

.9913

.9916

2.4

.9918

.9920

.9922

.9925

.9927

.9929

.9931

.9932

.9934

.9936

2.5

.9938

.9940

.9941

.9943

.9945

.9946

.9948

.9949

.9951

.9952

2.6

.9953

.9955

.9956

.9957

.9959

.9960

.9961

.9962

.9963

.9964

2.7

.9965

.9966

.9967

.9968

.9969

.9970

.9971

.9972

.9973

.9974

2.8

.9974

.9975

.9976

.9977

.9977

.9978

.9979

.9979

.9980

.9981

2.9

.9981

.9982

.9982

.9983

.9984

.9984

.9985

.9985

.9986

.9986

3.0

.9987

.9987

.9987

.9988

.9988

.9989

.9989

.9989

.9990

.9990

3.1

.9990

.9991

.9991

.9991

.9992

.9992

.9992

.9992

.9993

.9993

3.2

.9993

.9993

.9994

.9994

.9994

.9994

.9994

.9995

.9995

.9995

3.3

.9995

.9995

.9995

.9996

.9996

.9996

.9996

.9996

.9996

.9997

3.4

.9997

.9997

.9997

.9997

.9997

.9997

.9997

.9997

.9997

.9998

P (z 1) =0.8413

Figure: Finding

P (z 1)

0.9772

Figure: Finding P (z 2)
Illustration: Let us consider our random variable X with mean 50 and S.D. 10 i.e.
X : N (50,100). Suppose we want to find the probability that X is greater than 60, i.e. we want to
find P (X>60). We cannot evaluate this probability directly, but we can transform x to Z and then we
will be able to find the probability directly from the normal table. As stated the required transformation
is

Z =

. Hence

X 60
60 50
>
) = P (Z >
) = P (Z > 1).

10
P ( X > 60) = P (Z > 1) = 0.5000 0.3413 = 0.1587.
P ( X > 60) = P (

Example: A client has an investment portfolio whose mean value is equal to $ 500,000 with a
standard deviation of $15,000. She has asked you to determine the probability that the value of her
portfolio is between $485,000 and $530,000.
Solution: Let X be the value of investment portfolio. Then we have to calculate

485000 500000 X 500000 530000 500000

P (485000 X 530000) = P

15000
15000
15000

= P ( 1 Z +2 ) = P ( Z 2 ) P ( Z 1) = 0.9772 0.1587

= 0.8185.
Example: If X N (15,16), find the probability that X is larger than 18.
Solution: The probability can be computed as follows:

18
18 15

P ( x > 18) = P Z >

= PZ >
= P ( Z > 0.75 ) = 1 P ( Z < 0.75 )

16

= 1 0.7734 = 0.2266.
Example: The amounts of money requested on home loan applications at certain bank follow the
normal distribution, with a mean of $70000 and standard deviation of 20000. A loan application is
received this morning. What is the probability that
(i) The amount requested is $80000 or more?
(ii) The amount requested is between $65000 and $80000?
(iii) The amount requested is $65000 or more?
Solution: Let X be the amounts of money requested on home loan. Then
(i)

X 70000 80000 70000

P ( x 80000) = P

= P ( Z 0.50) = 1 P ( Z 0.50) = 1 0.6915

20000
20000

= 0.3085.

65000 70000 x 70000 80000 70000

P (65000 x 80000) = P

20000
20000
20000

= P ( 0.25 Z 0.50) = P( Z 0.50) P ( Z 0.25) = 0.6915 0.4013 = 0.2902.

x 70000 65000 70000

(iii) P ( x 65000) = P
= P ( Z 0.25) = 1 P ( Z 0.25)
20000
20000

(ii)

= 1- 0.5987 = 0.4013.
Example: A normal population has a mean of 20.0 and a standard deviation of 4.0.
(a) Compute the Z value associated with 25.0.
(b) What proportion of the population is between 20.0 and 25.0?
(c) What proportion of the population is less than 18.0?

25 20
= 1.25.

4
20 20 x 20 25 20

(b) We have to find the P (20 x 25) = P

= P ( 0 z 1.25 )
4
4
4
= P ( z 1.25) P ( z 0) = 0.8944 0.50 = 0.3944.
18 20
) = P ( z 0.50) = 0.3085.
(c) P ( x 18) = P ( z
4
Solution: (a) We know

Z =

Example: A normal distribution has a mean of 50 and a standard deviation of 4. Determine the value
below which 95% of the observations will occur.
Solution:

That is,

P ( z 1.65) = 0.9505. Therefore, 1.65 = Z =

x 50
x = 56.50.
4