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QAM I Review

This document contains a review of quantitative analysis methods (QAM) including: 1) The binomial distribution which models counting experiments with a fixed number of trials and constant probability of success. 2) How the normal distribution can approximate the binomial when the number of trials is large. 3) Examples of calculating probabilities using the binomial and normal distributions in Excel, R, and by normal approximation.

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Rajiv Kumar
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65 views

QAM I Review

This document contains a review of quantitative analysis methods (QAM) including: 1) The binomial distribution which models counting experiments with a fixed number of trials and constant probability of success. 2) How the normal distribution can approximate the binomial when the number of trials is large. 3) Examples of calculating probabilities using the binomial and normal distributions in Excel, R, and by normal approximation.

Uploaded by

Rajiv Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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QAM-I Review

Kaustav Banerjee

IIM Lucknow

October 2021

K Banerjee (IIML) QAM I Review October 2021 1 / 16


Problem

An MCQ paper has 10 questions, each question has 4 options of


which only one is correct. A student correctly answered 6 questions.
Do you think the student guessed these answers? If she got 5
answers correct, how would you assess her?
1 The answer is true/false: binary in nature
2 Response (true/false) to qustions are independent (?)
3 Probability (θ) of correctly answering remains same (?) for all
the questions

We can use a random variable X to denote the number of correct


answers out of 10. Of course, X is discrete valued random variable. Is
it safe to assume X ∼ Binomial(n = 10, θ)?

K Banerjee (IIML) QAM I Review October 2021 2 / 16


Unfair coin
Flip a coin three times: Ω = {HHH, HHT, HTH, THH, TTH, THT, HTT, TTT}
Assign X: number of heads in 3 flips of a coin ⇒ ΩX = {0, 1, 2, 3}
If the coin is fair, each outcome has probability 1/8. What if we do
not know whether the coin is fair or not?
Let θ ∈ (0,1) be the probability of getting a head with a single flip.
Notice: (1) the outcomes of a single flip are binary (2) successive
flips are independent and (3) θ remains constant across flips.
x P(X = x|θ = 1/2) P(X = x|θ)
0 1/8 (1 − θ)3
1 3/8 3θ(1 − θ)2
2 3/8 3θ2 (1 − θ)
3 1/8 θ3
1 1

K Banerjee (IIML) QAM I Review October 2021 3 / 16


Pascal’s triangle

K Banerjee (IIML) QAM I Review October 2021 4 / 16


Binomial distribution
A random variable X counting the number of success in n repetitions
of an experiment, has a binomial distribution with PMF
 
n x
P(X = x) = θ (1 − θ)n−x , x = 0, 1, 2, ..., n
x

where n and θ ∈ (0, 1) are two parameters.


Model assumptions
1. the experiment has dichotomous (success-failure) outcomes
2. successive trials are independent
3. success/failure probability remains same across the trials
Model characteristics
1. E(X) = nθ, V(X) = nθ(1 − θ)
2. If X1 ∼ B(n1 , θ) ⊥ X2 ∼ B(n2 , θ) ⇒ X1 + X2 ∼ B(n1 + n2 , θ)

K Banerjee (IIML) QAM I Review October 2021 5 / 16


0.00 0.05 0.10 0.15 0.20 0.25
Probability

0 2 4 6 8 10

Outcomes

Figure: Binomial distribution for n = 10, θ = 0.5

K Banerjee (IIML) QAM I Review October 2021 6 / 16


0.20
Probability

0.10
0.00

0 2 4 6 8 10

Outcomes

Figure: Binomial distribution for n = 10, θ = 0.25

K Banerjee (IIML) QAM I Review October 2021 7 / 16


0.20
Probability

0.10
0.00

0 2 4 6 8 10

Outcomes

Figure: Binomial distribution for n = 10, θ = 0.75

K Banerjee (IIML) QAM I Review October 2021 8 / 16


If she is guessing..
x P(X = x | θ = 1/4)
0 0.056
1 0.188
2 0.282
3 0.250
4 0.146
5 0.058
6 0.016
7 0.003
8 0.000
9 0.000
10 0.000
1

P(X ≥ 6 | θ = 1/4) ≈ 2% ⇒ She is guessing?


P(X ≥ 5 | θ = 1/4) ≈ 8% ⇒ She is guessing?

K Banerjee (IIML) QAM I Review October 2021 9 / 16


Compute binomial probabilities

P(X ≥ 6 | n = 10, θ = 1/4) = 1 − P(X < 6 | n = 10, θ = 1/4)


= 1 − P(X ≤ 5 | n = 10, θ = 1/4)
Excel Code = 1 − BINOM.DIST(5, 10, 0.25, TRUE)
R Code = 1 − pbinom(5, 10, 0.25)

P(X = 6 | n = 10, θ = 1/4) = BINOM.DIST(6, 10, 0.25, FALSE)


= dbinom(6, 10, 0.25)

K Banerjee (IIML) QAM I Review October 2021 10 / 16


Normal distribution
A continuous random variable X has normal distribution with mean µ
and standard deviation σ, with PDF
(x − µ)2
1 −
f(x) = √ e 2σ 2 , −∞ < x < ∞
2πσ 2
where −∞ < µ < ∞ and σ > 0 are parameters.
X−µ
1. E(X) = µ, V(X) = σ 2 , X ∼ N(µ, σ 2 ) ⇒ ∼ N(0, 1)
σ
2. If X ∼ N(µ, σ 2 ), a and b are constants, a + bX ∼ N(a + bµ, b2 σ 2 )
3. If X1 ∼ N(µ1 , σ12 ) ⊥ X2 ∼ N(µ2 , σ22 ), and constants a1 , a2 ∈ <,
a1 X1 + a2 X2 ∼ N(a1 µ1 + a2 µ2 , a21 σ12 + a22 σ22 )

K Banerjee (IIML) QAM I Review October 2021 11 / 16


Figure: N(µ = 0, σ 2 = 1)

Probability density

−5 −2 0 2 5

K Banerjee (IIML) QAM I Review October 2021 12 / 16


Figure: N(µ = 0, σ 2 = 1); N(µ = 0, σ 2 = 9)

Probability density

−10 0 10

K Banerjee (IIML) QAM I Review October 2021 13 / 16


Probability density

−3 −2 −1 0 1 2 3

P(|X − µ| < σ) = 0.683, P(|X − µ| < 2σ) = 0.954, P(|X − µ| < 3σ) = 0.997

K Banerjee (IIML) QAM I Review October 2021 14 / 16


Compute normal probabilities
GMAT scores for a group of students are approximately normally
distributed with mean 580 and SD = 55. Students above a score of
650 are admitted to a business school. What percentage of students
are expected to be admitted to the school? What is the score of the
student at the 95th percentile?

P(X > 650 | µ = 580, σ = 55) = 1 − P(X < 650 | µ = 580, σ = 55)
= 1 − NORM.DIST(650, 580, 55, TRUE)
= 1 − pnorm(650, 580, 55)

What is C so that P(X < C | µ = 580, σ = 55) = 0.95?

C = NORM.INV(0.95, 580, 55)


= qnorm(0.95, 580, 55)

K Banerjee (IIML) QAM I Review October 2021 15 / 16


Normal approximation to binomial

Suppose the examiner wishes to find the probability that a student


will correctly answer at least 60% questions while guessing. We can
obtain this probability P(X ≥ 0.6n | n = 10, θ = 1/4) as follows.

n Binomial model Normal model


10 0.019727707 0.005293569
20 0.000935392 0.000150299
−5
30 5.01×10 4.77×10−6

K Banerjee (IIML) QAM I Review October 2021 16 / 16

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