These slides are prepared completely based on the book of Ronald

M. Weiers (2011). Introduction to Business Statistics. 7th edition

Basic Statistics (For Accounting and Finance)

Belay Desyebelew

Addis Ababa University

[email protected]

February, 2022

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Chapter One: Introduction

Business statistics deals with collection, summarization, analysis, and

reporting of numerical findings relevant to a business decision or
situation
Statistics can be categorized into two broad categories depending on
whether the emphasis is on
1 simply describing the characteristics of a set of data or
2 proceeding from data characteristics to making generalizations,
estimates, forecasts, or other judgments based on the data

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Chapter One: Introduction
Descriptive Vs Inferential Statistics

Descriptive statistics: simply summarizes and describes the

characteristics of a set of data
Inferential statistics: makes generalizations, estimates, forecasts, or
other judgments based on the data
Inferential statistics goes beyond description of the data in hand
Examples:Descriptive Statistics
1 According to the Bureau of the Census, there are 2.2 million U.S.
households with a single father and one or more children younger than
18
2 There have been 82 confirmed or suspected suicides among active-duty
service personnel this year, compared to 51 for the same period in 2008
3 The number of mutual funds peaked at 8305 in 2001, but the
combination of bear markets and mergers and acquisitions has driven
the number of funds down to 8011
4 Since March 4, 2009, there have been 190,000 mortgage modifications
through President Obama’s relief plan; 396,724 homes in payment
default; and 607,974 homes in either foreclosure or auction proceedings.
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Chapter One: Introduction
Descriptive Vs Inferential Statistics

Examples: Inferential Statistics

1 In observing a sample of nurses and other healthcare workers who
were likely infected with the swine flu, researchers found that only
half routinely wore gloves when dealing with patients
2 In a Zagat survey of diners, Outback Steakhouse had the top-rated
steaks in the full-service restaurant category
3 Survey results revealed that 26% of thirsty golfers order a sports drink
when they finish their round and head for the clubhouse
4 In a survey of U.S. motorists, 33% said their favorite American
roadside store was South of the Border, in South Carolina

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Chapter One: Introduction
Key Terms for Inferential Statistics

Population: is the entire set of people or objects of interest

Sample: is a smaller number (a subset) of the people or objects that
exist within the larger population
A sample is said to be representative if its members tend to have the
same characteristics as the population from which they were selected
Statistic: is a measured characteristic of the sample
Parameter: is a measured characteristic of the population

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Chapter One: Introduction
Types of Variables and Scales of Measurement

Variable: is a characteristic or attribute that can assume different

values
Variables can be classified into two as qualitative and quantitative
variables
Qualitative variables: take a value that belongs to one of several
possible categories
Example: Gender (Male or Female), Hair color (brown, black, red,
blonde, or gray), etc.
Quantitative variables: take numeric values on which arithmetic
operations make sense.
There are two types of quantitative variables: discrete and continuous

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Chapter One: Introduction
Types of Variables Continued...

Discrete variables: take on only certain values along an interval,

with the possible values having gaps between them
Examples:
1 Number of employees on the payroll of a manufacturing
2 Number of patrons attending a theatrical performance
3 Number of defectives in a production sample
Continuous variables: can take on a value at any point along an
interval
The exact values continuous variables could take on would have no
gaps between them
Examples: Volume of liquid in a water tower, weight of a coal truck,
temperature, etc.

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Chapter One: Introduction
Scales of Measurement

Measurement is a process of assigning a numerical value to a variable

When a variable is measured, the result will be in one of the four
levels, or scales, of measurement, nominal, ordinal, interval, or ratio
Nominal Scale: uses numbers only for the purpose of identifying
membership in a group or category Example: Entergy Corporation
lists four types of domestic electric customers. In its computer
records, the company might use “1” to identify residential customers,
“2” for commercial customers, “3” for industrial customers, and “4”
for government customers. Aside from identification, these numbers
have no arithmetic meaning

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Chapter One: Introduction
Scales of Measurement Continued...

Ordinal Scale: uses numbers to represent “greater than” or “less

than” measurements, such as preferences or rankings
Example: Consider the following Women’s Tennis Association singles
rankings for female tennis players:
1. Dinara Safina
2. Serena Williams
3. Venus Williams
4. Elena Dementieva
In the ordinal scale, numbers are viewed in terms of rank (i.e., greater
than, less than), but do not represent distances between objects
For example, we cannot say that the distance between Dinara Safina
and Serena Williams is the same as the distance between Serena
Williams and Venus Williams

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Chapter One: Introduction
Scales of Measurement Continued...

Interval Scale: not only includes “greater than” and “less than”
relationships, but also has a unit of measurement that permits us to
describe how much more or less one object possesses than another
In an interval scale, the unit of measurement is arbitrary, and there is
no absolute zero level where none of a given characteristic is present
Example: IQ, Temperature in F 0
Ratio scale: is similar to the interval scale, but has an absolute zero
and multiples are meaningful
Example: Election votes, natural gas consumption, return on
investment, the speed of a production line, etc.

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Chapter Two: Visual Description of Data
Frequency Distribution and Histogram

Frequency Distribution: is a table that divides the data values into

classes and shows the number of observed values that fall into each
class
Histogram: describes a frequency distribution by using a series of
adjacent rectangles, each of which has a length that is proportional to
the frequency of the observations within the range of values it
represents
In either case, we have summarized the raw data in a condensed form
that can be readily understood and easily interpreted

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Chapter Two: Visual Description of Data
Key Terms in Frequency Distribution

Class: Each category of the frequency distribution

Frequency: The number of data values falling within each class
Class Limits: The boundaries for each class. These determine which
data values are assigned to that class
Class interval: The width of each class. This is the difference
between the lower limit of the class and the lower limit of the next
higher class
When a frequency distribution is to have equally wide classes, the
approximate width of each class is
Range
Approximate class width =
Number of classes desired
Where
Range =Largest value in raw data-Smallest value in raw data
Class Mark: The midpoint of each class. This is midway between the
upper and lower class limits
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Chapter Two: Visual Description of Data
Guidelines for the Frequency Distribution

The set of classes must be mutually exclusive (i.e., a given data value
can fall into only one class). There should be no overlap between
classes
The set of classes must be exhaustive (i.e., include all possible data
values). No data values should fall outside the range covered by the
frequency distribution
If possible, the classes should have equal widths. Unequal class widths
make it difficult to interpret both frequency distributions and their
graphical presentations

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Chapter Two: Visual Description of Data
Guidelines for the Frequency Distribution Continued...

Selecting the number of classes to use is a subjective process.

If we have too few classes, important characteristics of the data may
be buried within the small number of categories.
If there are too many classes, many categories will contain either zero
or a small number of values.
In general, about 5 to 15 classes will be suitable
Whenever possible, class widths should be round numbers (e.g., 5, 10,
25, 50, 100)
If possible, avoid using open-end classes. These are classes with either
no lower limit or no upper limit

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Chapter Two: Visual Description of Data
Relative and Cumulative Frequency Distributions

Relative Frequency Distribution: describes the proportion or

percentage of data values that fall within each category
Cumulative Frequency Distribution: describes the number of
observations that are within or below each of the classes
Cumulative Relative Frequency Distribution: describes the
proportion or percentage of data values that are within or below each
of the classes

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Chapter Two: Visual Description of Data
Frequency Distribution Continued...

Example: Consider the following raw data consisting of measured speeds

(mph) of 105 vehicles along a section of highway and construct a
frequency distribution including relative and cumulative frequencies (%)
54.2 58.7 71.2 69.7 51.7 75.6 53.7 57.0 82.5 76.8 62.1 67.4 64.6 70.5 48.4
69.0 65.2 64.1 65.8 56.9 82.0 62.0 54.3 73.2 74.5 73.6 76.2 55.1 66.9 62.4
70.7 68.3 62.8 83.5 54.8 68.3 69.4 59.2 60.9 60.4 60.2 75.4 55.4 56.3 77.1
61.2 50.8 67.1 70.6 60.7 56.0 80.7 80.1 56.2 70.1 63.7 70.9 54.6 61.6 63.2
72.2 84.0 76.8 61.6 61.1 80.8 58.3 52.8 74.3 71.4 63.2 57.8 61.9 75.8 80.8
57.3 62.6 75.1 67.6 78.0 52.2 57.6 61.1 66.9 88.5 66.7 61.2 73.9 79.1 70.2
65.2 61.3 69.5 72.8 57.5 71.4 64.7 78.4 67.6 76.3 78.6 66.8 71.1 58.9 61.1

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Chapter Two: Visual Description of Data
Frequency Distributions

Solution: Frequency Distribution (Number of Motorists in Each Category)

Speed (mph) Class Number Relative Cumulative Relative

Mark of Mo- fre- frequency Cumu-
torists quency lative
(%) frequency
(%)
45–under 50 47.5 1 0.95 1 0.95
50–under 55 52.5 9 8.57 10 9.52
55–under 60 57.5 15 14.29 25 23.81
60–under 65 62.5 24 22.86 49 46.66
65–under 70 67.5 17 16.19 66 62.85
70–under 75 72.5 17 16.19 83 79.05
75–under 80 77.5 13 12.38 96 91.43
80–under 85 82.5 8 7.62 104 99.05
85–under 90 87.5 1 0.95 105 100.00
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Chapter Two: Visual Description of Data
The Histogram

Histogram: describes a frequency distribution by using a series of

adjacent rectangles
Each of the rectangles has a length proportional to either the
frequency or the relative frequency of the class it represents
Example: The speed-measurement data can be presented using
Histogram as follows:

The lower class limits (e.g., 45 mph, 50 mph, 55 mph, and so on)
have been used in constructing the horizontal axis of the histogram
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Chapter Two: Visual Description of Data
Frequency Polygon

Frequency Polygon: consists of line segments connecting the points

formed by the intersections of the class marks with the class
frequencies
Relative frequencies or percentages may also be used in constructing
the figure
Example: Frequency polygon for the speed-measurement data

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Chapter Two: Visual Description of Data
Ogive

Ogive: a graphical display providing cumulative values for

frequencies, relative frequencies, or percentages
The cumulative values can be either “greater than” or “less than”
Example: Percentage ogive (less than type) for the
speed-measurement data

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Chapter Two: Visual Description of Data
Stem-and-Leaf Display

The stem-and-leaf display uses a subset of the original digits as class

descriptors
Example: The following raw data are the numbers of Congressional
bills vetoed during the administrations of seven U.S. presidents, from
Johnson to Clinton. Describe the data using stem-and-leaf plot

Johnson Nixon Ford Carter Reagan Bush Clinton

Vetoes 30 43 66 31 78 44 38
Solution:
Stem (10’s Digit) Leaf (1’s Digit)
3|018 (represents 30, 31, and 38)
4|34 (represents 43 and 44)
5| (no data values in the 50s)
6|6 (represents 66)
7|8 (represents 78)
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Chapter Two: Visual Description of Data
Dotplot

The dotplot displays each data value as a dot

It allows us to readily see the shape of the distribution as well as the
high and low values
Example: The dotplot presentation of the speed-measurement data
can be given as

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Chapter Two: Visual Description of Data
Bar Chart

Bar Chart: represents frequencies according to the relative lengths of

a set of rectangles
Bar chart represents qualitative data and the adjacent rectangles have
a gap between them
The bar chart (simple bar chart, multiple bar chart and stratified or
stacked bar chart) uses vertical or horizontal bars to represent the
frequencies of a distribution

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Chapter Two: Visual Description of Data
Bar Chart

Simple bar chart: is used to represents data involving only one

variable
Example: The following figure shows a simple bar chart describing
the number of U.S. nonrecreational airplane pilot certificates in each
of four categories

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Chapter Two: Visual Description of Data
Bar Chart continued

Multiple bar charts: are used to represent two or more sets of

inter-related data
Example: Draw a multiple bar chart to represent the following
import and export data (values in $) for the years 1991 to 1995
Years 1991 1992 1993 1994 1995
Imports 7930 8850 9780 11720 12150
Exports 4260 5225 6150 7340 8145

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Chapter Two: Visual Description of Data
Bar Chart continued

Stratified (Stacked or component) Bar Chart: is used to represent

data in which the total magnitude is divided into differen components
In stratified bar chart, first we make simple bars for each class taking
total magnitude in that class and then divide these simple bars into
parts in the ratio of various components
Example: The following data shows the quantity in hundred kgs of
Wheat, Barley and Oats produced on a certain farm during the years
1991 to 1994. Draw stratified bar chart to represent the data.
Years 1991 1992 1993 1994
Wheat 34 43 43 45
Barley 18 14 16 13
Oats 27 24 27 34
Total 79 81 86 92

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Chapter Two: Visual Description of Data
Line Graph

Line graph: is capable of simultaneously showing values of two

quantitative variables (y, or vertical axis, and x, or horizontal axis)
Line graph consists of linear segments connecting points observed or
measured for each variable
Example: The following line graph shows annual net income for
McDonald’s Corporation from 2003 through 2008

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Chapter Two: Visual Description of Data
Pie Chart

Pie chart: is a circular display divided into sections based on either

the number of observations within or the relative values of the
segments
The angle used for each piece of the pie can be calculated as

Numberofdegreesforthecategory = Relativevalueofthecategory × 360

Example: A pie chart to show the relative importance of four major

business segments in contributing to Home Depot Corporation’s
overall profit

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Chapter Two: Visual Description of Data
Pictogram

Pictogram: describe frequencies or other values of interest by using

symbols instead of a bar
In the pictogram, the symbols represent frequencies or other values of
interest
Example: The following chart shows how soft drink sales (millions of
cases) in Central America increased from 1996 through 1998

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Chapter Two: Visual Description of Data
Scatter Diagram

Scatter diagram or Scatter plot: is used to examine whether a

relationship exists between two quantitative variables.
Each point in the scatter diagram represents a pair of known or
observed values of two variables
Example: Draw a scatter diagram for the following data
Student 1 2 3 4 5 6 7 8 9 10
x 8 5 11 13 10 6 18 15 2 9
y 65 44 79 72 70 54 90 85 33 56

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Chapter Two: Visual Description of Data
Tabulation and Contingency Tables

Tabulation can be applied to variables which represent categories

In simple tabulation, also known as marginal or one-way tabulation,
we merely count how many people or items are in each category
Contingency Table: shows how many people or items are in
combinations of categories
Contingency Tables help us to identify and examine possible
relationships between the variables
These tabular methods can be extended to include the mean or other
measures of a selected quantitative variable for persons or items
within a category or combination of categories

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Chapter Two: Visual Description of Data
Tabulation and Contingency Tables

Example:The following data represents age category, gender, and

machine usage time for 50 persons observed using an automated
teller machine. The coding for the age and gender categories is as
follows: AgeCat = 1 for age < 30, 2 = for age 30–60, 3 = for age >
60; Gender = 1 for male, 2 = for female
Then
a) Construct a simple tabulation in which the counts are according to
gender
b) Construct a cross-tabulation using the gender and age group of
the persons
c) Construct a table showing mean usage times (in Seconds), by age
category and gender

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Chapter Two: Visual Description of Data
Tabulation and Contingency Tables

AgeCat Gender Seconds AgeCat Gender Seconds AgeCat Gender Seconds

1 2 50.1 2 2 46.4 2 1 33.2
1 1 53.0 2 1 31.0 2 2 29.1
2 2 43.2 2 1 44.8 2 1 37.7
1 2 34.9 2 1 30.3 2 2 54.9
3 1 37.5 2 1 33.6 1 2 29.4
2 1 37.8 3 2 56.3 3 1 37.1
3 1 49.4 2 2 37.8 3 2 42.9
1 1 50.5 1 2 34.4 1 2 44.3
3 1 48.1 2 1 32.9 3 2 45.0
1 2 27.6 1 1 26.3 2 2 47.6
3 2 55.6 2 1 30.8 1 1 58.1
2 2 50.8 1 1 24.1 1 2 32.0
3 1 43.6 1 2 43.6 2 1 36.9
1 1 35.4 2 2 29.9 1 1 27.5
1 2 37.7 2 1 26.3 3 1 42.3
3 1 44.7 3 1 47.7 2 1 34.1
2 1 39.5 1 2 40.1

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Chapter Two: Visual Description of Data
Tabulation and Contingency Tables

Solution:
a) Simple tabulation by gender
Gender 1=Male 2=Female Total
No of Persons 28 22 50

b) Cross-tabulation or contingency table by age category and gender

Gender:
Age Category: 1 = Male 2= Female Total
1 = under 30 yr. 7 10 17
2 = 30–60 yr. 13 8 21
3 = over 60 yr. 8 4 12
Total 28 22 50

c) Mean usage times (in Seconds), by age category and gender

Gender:
Age Category: 1 = Male 2 = Female Total
1 = under 30 yr. 39.27 37.41 38.18
2 = 30–60 yr. 34.53 42.46 37.55
3 = over 60 yr. 43.80 49.95 45.85
Total 38.36 41.53 39.76

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Chapter Three: Statistical Description of Data
Introduction

In this chapter, statistical methods for describing typical values in the

data as well as the extent to which the data are spread out will be
examined
Measures of central tendency: Numbers describing typical data
values, like Mean, median and mode
Measures of dispersion: Numbers that describe the scatter of the
data. These measures allow us to numerically describe the scatter, or
spread of measurements
The measures of dispersion include range, mean absolute deviation,
variance, and standard deviation

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Chapter Three: Statistical Description of Data
Measures of Central Tendency

Arithmetic Mean: the sum of the data values divided by the number
of observations
It is denoted by µ (population mean) or X (sample mean)
PN
i=1 xi
µ=
N
Example: Calculate the mean of the following data on shipments of
peanuts (thousands of bags) from a hypothetical U.S. exporter to five
Canadian cities
City Montreal Ottawa Toronto Vancouver Winnipeg
Peanut 64.0 15.0 285.0 228.0 45.0

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Chapter Three: Statistical Description of Data
Measures of Central Tendency

Weighted Mean: When some values are more important than

others, a weighted mean may be calculated where each data value is
weighted according to its relative importance
PN
i=1 wi xi
µw = P
wi

Example: Continuing with the peanut example, let’s assume that

shipments to the respective cities will be sold at the following profits
per thousand bags: $15.00, $13.50, $15.50, $12.00, and $14.00.
Then calculate the average profit.

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Chapter Three: Statistical Description of Data
Measures of Central Tendency

Median: is the value that has just as many values above it as below it
It is obtained by arranging the data in an increasing or decreasing
order of magnitude
After values are arranged from smallest to largest, median is
calculated
The median is the middle value (if the sample size n is odd) or the
average of the two middle values (if the sample size n is even)
Example: Find the median of
1 the numbers of bags of peanuts (in thousands) shipped by the U.S.
exporter to the five Canadian cities (the example given for the
arithmetic mean)
2 the following data for percentage return on average assets over an
8-year period reported by Ryder System, Inc: 2.8, 7.0, 1.6, 0.4, 1.9,
2.6, 3.8 and 3.8

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Chapter Three: Statistical Description of Data
Measures of Central Tendency

Mode: is a value that occurs with the greatest frequency

A data set may not have a mode or may have more than one mode
When there is only one mode, a distribution of values is referred to as
unimodal
When there are two modes, a distribution of values is referred to as
bimodal
Example: Find the mode of
1 the 8 years of return-on-assets data reported by Ryder System, Inc (the
second example given for median)
2 2, 6, 4, 8.6, 7, 25
3 11, 18, 6, 8, 11, 3, 6, 5

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Chapter Three: Statistical Description of Data
Quantiles

Quantiles: separate the data into equal-size groups in order of

numerical value
There are several kinds of quantiles, including quartiles, deciles and
percentiles
After values are arranged from smallest to largest, the quantiles are
calculated
Quartiles: divide the values into four parts of equal size, each
comprising 25% of the observations
Deciles: divide the values into 10 parts of equal size, each comprising
10% of the observations
Percentiles: divide the values into 100 parts of equal size, each
comprising 1% of the observations

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Chapter Three: Statistical Description of Data
Measures of Central Tendency for Grouped Data

Arithmetic Mean PN
i=1 fi cmi
µ=
N
Median n
− Fc
Xe = Lm + [ 2 ]w
fm
Where
Lm = lower class boundary of the interval containing the median
Fc = cumulative frequency of the interval just above the median class
interval
fm = frequency of the interval containing the median
w = class interval width
n = total number of observations

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Chapter Three: Statistical Description of Data
Measures of Central Tendency for Grouped Data

Mode
△1
Xb = Lmod + ( )w
△1 + △2
Where
Lmod = lower class boundary of the modal class
△1 = fmod − f1
△2 = fmod − f2
fmod = frequency of the modal class
f1 = frequency of the class preceding the modal class
f2 = frequency of the class succeeding the modal class

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Chapter Three: Statistical Description of Data
Measures of Central Tendency for Grouped Data

Consider the following data on the usage times of the 50 automated

teller machine (ATM) customers
Time(seconds) Class Mark Frequency LCF
20–under 25 22.5 1 1
25–under 30 27.5 7 8
30–under 35 32.5 10 18
35–under 40 37.5 9 27
40–under 45 42.5 9 36
45–under 50 47.5 6 42
50–under 55 52.5 5 47
55–under 60 57.5 3 50

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Chapter Three: Statistical Description of Data
Measures of Central Tendency for Grouped Data

Then calculate
1 Mean
2 Median
3 Mode

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Chapter Three: Statistical Description of Data
Measures of Dispersion

The dispersion of a distribution refers to the amount of scatter in the

values
The most common measures of dispersion include range, mean
absolute deviation, variance and standard deviation
Range: the simplest measure of dispersion which is the difference
between the highest and lowest values
Interquartile range: is the difference between the third quartile and
the first quartile, or Q3 -Q1
Quartile Deviation: is one-half the interquartile range ( Q3 −Q
2
1
)

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Chapter Three: Statistical Description of Data
Measures of Dispersion

Mean absolute deviation (MAD): is the average of the absolute

values of differences from the mean
P
|xi − µ|
MAD =
N
where µ = population mean
xi = the i th data value
N = number of data values in the population

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Chapter Three: Statistical Description of Data
Measures of Dispersion

Variance: For a population, the variance (σ 2 ) is the average of

squared differences between the N data values and the mean
Sample variance (s 2 ) is obtained by dividing the sum of the squared
differences between the n data values and the mean (x) by n-1

Variance for a population:

(xi − µ)2
P
σ2 =
N

Variance for a sample:

(xi − x)2
P
2
s =
n−1

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Chapter Three: Statistical Description of Data
Measures of Dispersion

Standard Deviation: is the positive√square root

√ of the variance of
either a population or a sample (σ= σ or s= s 2 )
2

Variance and standard deviation cannot be equal to zero unless all

members of the population or sample have the same value
If the same number is added to or subtracted from all the values, the
variance and standard deviation are unchanged
For grouped Data:
P
fi |xi − µ|
MAD =
N
fi (xi − µ)2
P
σ2 =
N
Where, fi and xi , respectively are the frequency and class midpoint of
the i th class
Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 48 / 126
Chapter Three: Statistical Description of Data
Examples:Consider the following data sets
1 Estimated highway fuel economy (mpg) for five 2009 sports-utility
vehicles
Model Highway mpg (xi)
Saturn Outlook 23
Jeep Liberty 21
Subaru Tribeca 21
Land Rover LR3 17
Porsche Cayenne GTS 18
2 Data on the usage times of 50 automated teller machine customers
Time(seconds) Class Mark Frequency LCF
20–under 25 22.5 1 1
25–under 30 27.5 7 8
30–under 35 32.5 10 18
35–under 40 37.5 9 27
40–under 45 42.5 9 36
45–under 50 47.5 6 42
50–under 55 52.5 5 47
55–under 60 57.5 3 50
Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 49 / 126
Chapter Three: Statistical Description of Data
Measures of Dispersion

Then calculate
a) Range
b) Mean absolute deviation
c) Variance and
d) Standard deviation

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 50 / 126
Chapter Three: Statistical Description of Data
Measures of Dispersion

Solution:
1. a)
Range = 23 − 17 = 6

b) P
xi 23 + 21 + 21 + 17 + 18
x = = = 20
n 5
⇒ P
|xi − x| |23 − 20| + |21 − 20| + ... + |18 − 20|
MAD = = =2
n 5
c)
(xi − x)2 (23 − 20)2 + (21 − 20)2 + ... + (18 − 20)2
P
2
s = = =6
n−1 5−1

d)
p √
s = s2 = 6 = 2.45

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 51 / 126
Chapter Three: Statistical Description of Data
Measures of Dispersion

2. a)
Range = 60 − 20 = 40

b) P
fi xi 1 × 22.5 + 7 × 27.5 + ... + 3 × 57.5
x = = = 39.6
n 50
⇒ P
fi |xi − x| 1 × |22.5 − 39.6| + 7 × |27.5 − 39.6| + ... + 3 × |57.5 − 39.6|
MAD = = = 7.67
n 50
c)
fi (xi − x)2 1 × (22.5 − 39.6)2 + ×(27.5 − 39.6)2 + ... + 3 × (57.5 − 39.6)2
P
2
s = = = 83.77
n−1 50 − 1

d)
p √
s = s2 = 83.77 = 9.15

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 52 / 126
Chapter Three: Statistical Description of Data
Additional Dispersion Topics

The Box-and-Whisker Plot: is a graphical device that

simultaneously displays several of the measures of central tendency
and dispersion
It highlights the first and third quartiles, the median, and the extreme
values in the data
It helps us see whether the distribution is symmetrical or whether it is
skewed either negatively or positively

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 53 / 126
Chapter Three: Statistical Description of Data
Additional Dispersion Topics

Chebyshev’s Theorem: It specifies the minimum percentage of

observations that will fall within a given number of standard
deviations from the mean, regardless of the shape of the distribution
Chebyshev’s Theorem: For either a sample or a population, the
percentage of observations that fall within k (for k > 1) standard
deviations of the mean will be at least
1
(1 − ) × 100
k2

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 54 / 126
Chapter Three: Statistical Description of Data
Additional Dispersion Topics

Example: Let the mean and standard deviation of a given data are µ =
34.6 and σ = 49.3. Then use Chebyshev’s theorem to find the percentage
of values that should fall within k = 2 and k = 3 standard deviations of
the mean
Solution: For k = 2, (1 − k12 ) × 100 = (1 − 212 ) × 100 = 75%. This
implies that at least 75% of the data fall in the interval described by
34.6±2(49.3), or (-64.0, 133.2)
For k = 3, (1 − k12 ) × 100 = (1 − 312 ) × 100 = 88.89%. This implies that
88.89% of the data fall in the interval described by 34.6±3(49.3), or
(-113.3, 182.5)

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 55 / 126
Chapter Three: Statistical Description of Data
Additional Dispersion Topics

The Empirical Rule: is a rule of thumb that applies only to

distributions that are bell shaped and symmetrical
1 About 68% of the observations will fall within 1 standard deviation of
the mean
2 About 95% of the observations will fall within 2 standard deviations of
the mean
3 Practically all of the observations will fall within 3 standard deviations
of the mean

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 56 / 126
Chapter Three: Statistical Description of Data
Additional Dispersion Topics

Standardized Data: Standardizing a data is involves expressing each

data value in terms of its distance (in standard deviations) from the
mean
For each observation in a sample:
xi − x
zi =
s
where zi =standardized value for the i th observation, x=sample mean,
xi = the i th data value and s = sample standard deviation
A standardized distribution will always have a mean of 0 and a
standard deviation of 1

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 57 / 126
Chapter Three: Statistical Description of Data
Additional Dispersion Topics

Standardizing the original data values makes it easier to compare two

sets of data in which the original measurement units are not the same
Example: Standardization of estimated highway fuel economy (mpg)
data for a sample of five 2009 sports-utility vehicles

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 58 / 126
Chapter Three: Statistical Description of Data
Additional Dispersion Topics

The Coefficient of Variation: is an expression of the standard

deviation as a percentage of the mean
It indicates the relative amount of dispersion in the data
This enables us to easily compare the dispersions of two sets of data
that involve different measurement units
The coefficient of variation is expressed as a percentage and is
calculated as
σ
CV = × 100, for population data
µ
s
CV = × 100, for sample data
x

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 59 / 126
Chapter Three: Statistical Description of Data
Additional Dispersion Topics

Example: Suppose that, over a sample of 12 months, the mean price of

gold had been x = $810.6 per ounce, with a standard deviation of s =
$49.0 per ounce, while the mean and standard deviation for slab zinc
during this same period had been $1.04 per pound and $0.08 per pound,
respectively. Which commodity would have had the greater relative
dispersion, or coefficient of variation?
Solution: CVgold = xs × 100 = 810.6 49.0
× 100 = 6.0%, and CVslab zinc =
s 0.08
x × 100 = 1.04 × 100 = 7.7%. This implies that the variability of gold
prices was less than that for slab zinc

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 60 / 126
Chapter Three: Statistical Description of Data
Statistical Measures of Association

Coefficient of Correlation: is a number that indicates both the

direction and the strength of the linear relationship between two
variables (say, X and Y)
It is denoted by r and takes values between and including -1 and 1
Direction of the relationship: If r is positive, y and x are directly
related, and if r is negative, the variables are inversely related
Strength of the relationship : The larger the absolute value of r,
the stronger the linear relationship between y and x

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 61 / 126
Chapter Four: Probability and Probability Distributions
Basic Terms

Experiment: An activity or measurement that results in an outcome

Sample Space: All possible outcomes of an experiment
Event: One or more of the possible outcomes of an experiment; a subset
of the sample space
Probability: A number between 0 and 1 that expresses the chance that an
event will occur
An event is almost anything of interest to the observer
Example: Rain tomorrow, a 30-point increase in the Dow Jones Industrial
Average (DJIA) next week, or even that you’ll take time out for a soft
drink before finishing this page

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 62 / 126
Chapter Four: Probability and Probability Distributions
Basic Terms

Example: Consider the possibility that the DJIA will increase by at least
30 points during the next week and identify the experiment, sample space,
the event of interest and probability
Solution:
▶ Experiment: Next week’s trading activities on the New York Stock
Exchange
▶ Sample space: The sample space consists of two possible outcomes:
(1) the DJIA goes up by at least 30 points, and (2) it does not
▶ Event: The DJIA goes up by at least 30 points next week
▶ probability: The chance that the DJIA will increase by at least 30
points next week

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 63 / 126
Chapter Four: Probability and Probability Distributions
Basic Terms

Let P(A) be the probability of any given event, A. Then P(A) has the
following properties.
1 0 ≤ P(A) ≤ 1: For any event, the probability will be no less than 0
and no greater than 1
2 P(A) + P(A’) = 1: Either the event will occur (A) or it will not occur
(A’). A’ is called the complement of A
3 P(A) = 0 indicates that the event A is impossible event
4 P(A) = 1 indicates that the event A is certain or sure event

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 64 / 126
Chapter Four: Probability and Probability Distributions
Probability Approaches

Classical Approach: describes a probability in terms of the proportion of

times that an event can be theoretically expected to occur
For outcomes that are equally likely

Number of possible outcomes in which the event occurs

Probability =
Total number of possible outcomes
Examples
1 In rolling a 6-sided die, the probability of getting a “three” is 1
6
2 The probability of tossing a coin and having it land “heads” is 1
2
Classical probabilities find their greatest application in games of chance,
but they are not so useful when we are engaged in real-world activities
where either
1 The possible outcomes are not equally likely or

2 The underlying processes are less well known

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 65 / 126
Chapter Four: Probability and Probability Distributions
Probability Approaches

Relative Frequency Approach: In this approach, probability is the

proportion of times an event is observed to occur in a very large number of
trials
Number of trials in which the event occurs
Probability =
Total number of trials

The relative frequency approach to probability depends on what is

known as the law of large numbers
Over a large number of trials, the relative frequency with which an
event occurs will approach the probability of its occurrence for a
single trial
The life insurance industry relies heavily on relative frequencies in
determining both candidate acceptability and the premiums that must
be charged
Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 66 / 126
Chapter Four: Probability and Probability Distributions
Probability Approaches

Subjective Approach: is judgmental, representing the degree to which

one happens to believe that an event will or will not happen
Subjective probabilities are neither based on mathematical theory nor
developed from numerical analyses of the frequencies of past events.
This doesn’t make them meaningless, however
Examples: The following subjective probabilities might be considered
reasonable with regard to your activities today
Event Subjective Probability
You will be mugged while reading this page Low (Prob. ≤ 0.001)
You’ll talk to someone on the phone today Medium (Prob. ≥ 0.600)
Your shoes are on the right feet. High (Prob. ≥ 0.999)

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 67 / 126
Chapter Four: Probability and Probability Distributions
Probabilities and “Odds”

Odds: a way of expressing the likelihood that something will happen

When someone says “the odds for this outcome are three to one,”
she/he is really saying that the chance of the event occurring is three
times the chance that it will not occur
Odds can be converted to a probability, and vice versa as follows
1 If the odds in favor of an event happening are A to B, or A:B, the
probability can be expressed as
A
A+B
2 If the probability of an event is x (with 0 ≤ x ≤ 1), the odds in favor
of the event are “x to (1 - x),” or “x:(1 - x)”

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 68 / 126
Chapter Four: Probability and Probability Distributions
Unions and Intersections of Events

Mutually Exclusive Events: If one event occurs, the other cannot

occur. An event (e.g., A) and its complement (A’) are always
mutually exclusive
Exhaustive Events: A set of events is exhaustive if it includes all the
possible outcomes of an experiment. The mutually exclusive events A
and A’ are exhaustive because one of them must occur
When the events within a set are both mutually exclusive and
exhaustive, the sum of their probabilities is 1.0
Intersection of Events: Two or more events occur at the same time.
Such an intersection can be represented by “A and B,” or “A and B
and C,” depending on the number of possible events involved
Union of Events: At least one of a number of possible events
occurs. A union is represented by “A or B,” or “A or B or C,”
depending on the number of events
Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 69 / 126
Chapter Four: Probability and Probability Distributions
Unions and Intersections of Events

Example: Consider the following data on fireworks victims

Mutually exclusive events: The victims were either male (event A,

8913 persons) or female (event A’, 2536 persons)
Exhaustive events: The four mutually exclusive events (A and B),
(A and B’), (A’ and B), and (A’ and B’) are also exhaustive since a
victim must be in one of these sex/age categories

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 70 / 126
Chapter Four: Probability and Probability Distributions
Unions and Intersections of Events

Intersection of events: There were 3477 victims who were males

under the age of 15, the “A and B” category.
Union of events: There were 10,162 victims who were either male,
or under age 15, or both, the “A or B” category. This category
includes everyone except females who were 15 or older and its
frequency is calculated as 5436+3477+1249 = 10,162.

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 71 / 126
Chapter Four: Probability and Probability Distributions
Unions and Intersections of Events

Venn diagrams describing persons injured by fireworks

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 72 / 126
Chapter Four: Probability and Probability Distributions
Addition Rules for Probability

There are occasions where we wish to determine the probability that

one or more of several events will occur in an experiment in which the
determination of the probabilities involves the use of addition rules
1 When Events are Mutually Exclusive: When events are mutually
exclusive, the probability that one of the events will occur is the sum of
their individual probabilities

Rule of addition when events are mutually exclusive:

p(A or B) = p(A) + p(B)

2 When Events are not Mutually Exclusive:

General rule of addition when events are not mutually exclusive:

p(A or B) = p(A) + p(B) − p(A and B)

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 73 / 126
Chapter Four: Probability and Probability Distributions
Multiplication Rules for Probability

These rules are used for determining the probability that two or more
of the events will all occur
Marginal Probability: The probability that a given event will occur.
No other events are taken into consideration. A typical expression is
P(A)
Joint Probability: The probability that two or more events will all
occur. A typical expression is P (A and B)
Conditional probability: The probability that an event will occur,
given that another event has already happened. A typical expression
is P(A|B), with the verbal description, “the probability of A, given B”

Conditional probability of event A, given that event B has occurred:

p(A and B)
p(A|B) = , p(B) > 0
p(B)

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 74 / 126
Chapter Four: Probability and Probability Distributions
Multiplication Rules for Probability

Independent Events: Events are independent when the occurrence

of one event has no effect on the probability that another will occur.
Dependent Events: Events are dependent when the occurrence of
one event changes the probability that another will occur
When Events are Independent: When events are independent,
their joint probability is the product of their individual probabilities

Multiplication rule when events are independent (for the case of two
events):
p(A and B) = p(A) ∗ p(B)

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 75 / 126
Chapter Four: Probability and Probability Distributions
Multiplication Rules for Probability

Example:The following tree diagram illustrates two coin tosses, a process

involving independent events. The probability of heads on one toss has no
effect on the probability of obtaining heads on the next

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 76 / 126
Chapter Four: Probability and Probability Distributions
Multiplication Rules for Probability

When Events are not Independent: the occurrence of one will

influence the probability that another will take place
Multiplication rule when events are not independent:
p(A and B) = P(A) ∗ P(B|A)

Example 1: The following figure shows relative frequency contingency

table and marginal, joint, and conditional probabilities for a randomly
selected fireworks victims

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 77 / 126
Chapter Four: Probability and Probability Distributions
Multiplication Rules for Probability

An example on how the probabilities here are calculated,

\ 3477 \ 8913 3477
p(A B) = = 0.304 or p(A B) = p(A) × P(B|A) = × = 0.304
11449 11449 8913

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 78 / 126
Chapter Four: Probability and Probability Distributions
Multiplication Rules for Probability

Example 2: When sampling without replacement from a bin containing 8

good bolts and 2 defective bolts, the probability that the second bolt is
defective will depend on whether or not the first one selected was
defective. If the first bolt is defective, the probability that the second one
will be defective is p(D2 |D1 ) = 0.111

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 79 / 126
Chapter Four: Probability and Probability Distributions
Bayes’ Theorem and the Revision of Probabilities

Example: A dryer manufacturer purchases heating elements from three

different suppliers: Argostat, Bermrock, and Thermtek. 30% of the
heating elements are supplied by Argostat, 50% by Bermrock, and 20% by
Thermtek. The elements are mixed in a supply bin prior to inspection and
installation. Based on past experience, 10% of the Argostat elements are
defective, compared to only 5% of those supplied by Bermrock, and just
4% of those from Thermtek. An assembly worker randomly selects an
element for installation. What is the probability that the element was
supplied by Argostat?
Solution:
Events
A1 = The element was produced by Argostat
A2 = The element was produced by Bermrock
A3 = The element was produced by Thermtek

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 80 / 126
Chapter Four: Probability and Probability Distributions
Bayes’ Theorem and the Revision of Probabilities

Prior Probability: This is an initial probability based on the present

level of information. On this basis, P(A1 ) = 0.300 since Argostat
supplies 30% of the heating elements
Additional Information
Upon testing the element before installation, an inspector finds it to
be defective
Events
B = a tested element is defective
B’ = a tested element is not defective
Posterior Probability: This is a revised probability that has the
benefit of additional information. It is a conditional probability and
can be expressed as P(A1 |B)

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 81 / 126
Chapter Four: Probability and Probability Distributions
Bayes’ Theorem and the Revision of Probabilities

Example:Heating-element tree diagram, shown in the order in which the

elements are received and found to be either defective or good

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 82 / 126
Chapter Four: Probability and Probability Distributions
Bayes’ Theorem and the Revision of Probabilities

Bayes’ Theorem: The theorem deals with sequential events, using

information obtained about a second event to revise the probability that a
first event has occurred
Bayes’ Theorem for the Revision of Probability:
Events A and B Probability of A, given that event B has occurred:

p(A and B) p(A) × p(B|A)

p(A|B) = =
p(B) [p(A) × p(B|A)] + [p(A′ ) × p(B|A′ )]

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 83 / 126
Chapter Four: Probability and Probability Distributions
Bayes’ Theorem and the Revision of Probabilities

Example: This reversal of the tree diagram in the previous slide shows
that the probability that the defective heating element came from Argostat
is 0.476. The prior probability, P(A1 ) = 0.300, has been converted to a
revised probability, P(A1 |B) = 0.476

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 84 / 126
Chapter Four: Probability and Probability Distributions
Bayes’ Theorem and the Revision of Probabilities

General form: Probability of event Ai , given that event B has

occurred:
p(Ai and B) p(Ai ) × p(B|Ai )
p(Ai |B) = = Pk
p(B) j=1 p(Aj ) × (B|Aj )

Where Ai = the i th of k mutually exclusive and exhaustive events

Example: Applying the general form of Bayes’ theorem, the heating

element had to come from one of k = 3 suppliers: Argostat (event A1),
Bermrock (event A2), or Thermtek (event A3). Additional information is
available in the form of knowledge that the heating element is defective
(event B). We must use the general form of the theorem because the
number of suppliers is more than two. Given that the heating element is
defective, Bayes’ theorem is used in determining the probability that it was
supplied by Argostat.
Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 85 / 126
Chapter Four: Probability and Probability Distributions
Bayes’ Theorem and the Revision of Probabilities

p(A − i) × p(B|Ai )
p(Ai |B) = Pk
j=1 p(Aj ) × p(B|Aj )
p(A1 )=0.300 (Argostat supplies 30% of the elements)
P(B|A1 )=0.100 (Of the elements supplied by Argostat, 10% are defective)
p(A2 )=0.500 (Bermrock supplies 50% of the elements)
P(B|A2 ) = 0.050 (Of the elements supplied by Bermrock, 5% are
defective) P(A3 )=0.200 (Thermtek supplies 20% of the elements)
P(B|A3 ) = 0.040 (Of the elements supplied by Thermtek, 4% are
defective)
p(A − 1) × p(B|A1 )
p(A1 |B) =
[p(A − 1) × p(B|A1 )] + [p(A2 ) × p(B|A2 )] + [p(A3 ) × p(B|A3 )]
0.300 × 0.100
=
[0.300 × 0.100] + [0.500 × 0.050] + [0.200 × 0.040]
0.030
= = 0.476
0.063
Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 86 / 126
Chapter Four: Probability and Probability Distributions
Bayes’ Theorem and the Revision of Probabilities

Example: A contingency table showing relative frequencies and marginal,

joint, and conditional probabilities for the heating-element

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 87 / 126
Chapter Four: Probability and Probability Distributions
Counting: Permutations and Combinations

Fundamentals of Counting
If there are m ways in which a first event can happen, and n ways in
which a second event can then occur, the total number of possibilities
is m×n. This can be described as the principle of multiplication

The Principle of Multiplication:

If, following a first event that can happen in n1 ways, a second event
can then happen in n2 ways, the total number of ways both can
happen is n1 × n2
Alternatively, if each of k independent events can occur in n different
ways, the total number of possibilities is nk

Example: Suppose that a state’s auto license plates include 6 different

numbers or letters, and that all 26 letters and 10 digits are available.
Then, there can be (36)6 , or 2,176,782,336 different license plates
Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 88 / 126
Chapter Four: Probability and Probability Distributions
Counting: Permutations and Combinations

Permutations
Permutations refer to the number of different ways in which objects
can be arranged in order
In a permutation, each item can appear only once, and each order of
the items’ arrangement constitutes a separate permutation
Number of permutations of n objects taken r at a time:
n!
(n−r )!

Example 1: Bill has 6 textbooks, but can fit only 4 of them onto a small
shelf. If the other 2 books have to sit on the desk, in how many ways can
Bill arrange the shelf?
Solution: n = 6 objects, taken r = 4 at a time, and the number of
choices available for the shelf arrangement would be
n! 6! 6×5×4×3×2×1
= = = 360
(n − r )! (6 − 4)! 2×1
Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 89 / 126
Chapter Four: Probability and Probability Distributions
Counting: Permutations and Combinations

Example 2: A tax auditor has 9 different returns to audit, but will have
time to examine only 5 of them tomorrow. In how many different orders
can tomorrow’s task be carried out?
Solution: n = 9 objects, taken r = 5 at a time, and the number of
different orders for doing tomorrow’s work will be
n! 9! 9×8×7×6×5×4×3×2×1
= = = 15, 120
(n − r )! (9 − 5)! 4×3×2×1
Combinations
Unlike permutations, combinations consider only the possible sets of
objects, regardless of the order in which the members of the set are
arranged
Number of combinations of n objects taken r at a time:
 
n n!
=
r r !(n − r )!
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Chapter Four: Probability and Probability Distributions
Counting: Permutations and Combinations

Example 1: In the bookshelf example, there would be 15 different

combinations by which Bill could select 4 of the 6 books for storage on the
shelf. This is calculated by
 
n n! 6! 6×5×4×3×2×1
= = = = 15
r r !(n − r )! 4!(6 − 4)! (4 × 3 × 2 × 1)(2 × 1)

Example 2: In the tax return example, if the tax auditor does not
consider the order in which tomorrow’s audits are carried out, there will be
126 different compositions for the group of persons whose returns are
audited that day. This is calculated as
 
n n! 9! 9 × 8 × 7 × 6 × 5! 3024
= = = = = 126
r r !(n − r )! 5!(9 − 5)! 5! × 4! 24

Belay Desyebelew (AAU) Basic Statistics (For Accounting and Finance) February, 2022 91 / 126
Chapter Four: Probability and Probability Distributions
Definitions and Classification of Probability Distribution

Probability distribution is the relative frequency distribution that

should theoretically occur for observations from a given population
Random variables can be either discrete or continuous
Discrete random variable: A random variable that can take on only
certain values along an interval, with the possible values having gaps
between them
Example: In a given group of five children, the number who got at
least one electronic toy for Christmas would be 0, 1, 2, 3, 4, or 5. It
could not be a number between any of these values, such as 2.33
Continuous random variable: A random variable that can take on a
value at any point along an interval
Example: The exact temperature outside as you’re reading this slide
could be 13.568, 78.352, or 83.815 degrees Fahrenheit, or any of an
infinity of other values in the range of temperatures where colleges
and universities are located
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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

A discrete probability distribution is a listing of all possible outcomes

of an experiment, along with their respective probabilities of
occurrence
Example: An experiment is conducted in which a fair coin is flipped
twice. The result of the experiment will be the random variable x =
the number of times that heads comes up
Solution: Since the two tosses are independent, the probability of
heads remains constant at P(heads) = 0.5 from one toss to the next
Each of four possible sequences is equally likely, and each has a
probability of 0.25
Sequence x = Number of Heads Probability
HH 2 0.25 = (0.5 * 0.5)
HT 1 0.25
TH 1 0.25
TT 0 0.25
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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

Then, the probability distribution for the discrete random variable x =

number of heads in two coin tosses can be given as:
x 0 1 2
p(x) 0.25 0.5 0.25
Because the possible sequences are mutually exclusive (only one of
them can happen for a given series of two tosses), the sum of the
joint probabilities is 1.00
Two of the sequences (HT and TH) involve one head, and we can use
the addition rule P(HT or TH) = P(HT) + P(TH) = 0.25 + 0.25 =
0.50)

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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

Characteristics of a discrete probability distribution:

1 For any value of x, 0 ≤p(x) ≤ 1
2 The values of x are exhaustive: The probability distribution includes
all possible values
3 The values of x are mutually exclusive: Only one value can occur for
a given experiment
P
4 The sum of their probabilities is one, or p (xi )=1

Example: A financial counselor conducts investment seminars with each

seminar limited to 6 attendees. Because of the small size of the seminar
group and the personal attention each person receives, some of the
attendees become clients following the seminar. For the past 20 seminars
she has conducted, , x (for x = the number of attendees who become
clients) has had the relative frequency distribution shown in the following
table
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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

x 0 1 2 3 4 5 6
p(x) 0.05 0.1 0.2 0.25 0.15 0.15 0.1
Then, find
a) the probability that nobody will become a client
b) the probability that at least 4 will become clients
Solution:
a) P(x=0) = 0.05
b) p(x≥ 4)=p(x=4)+p(x=5)+p(x=6)=0.15+0.15+0.1=0.4

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Chapter Four: Probability and Probability Distributions
The Mean and Variance of a Discrete Probability Distribution

The mean of a discrete probability distribution for a discrete random

variable is called its expected value, and this is referred to as E(x), or
µ
The variance is the expected value of the squared difference between
the random variable and its mean, or E [(x − µ)2 ]
General formulas for the mean and variance of a discrete probability
distribution:
Mean:
X
µ = E (x)or µ = xi P(xi ) for all possible values of x

Variance: X
σ 2 = E [(x − µ)2 ]or σ 2 = [xi − µ]2 p(xi )
for all values of x, and the standard deviation is
√
σ = σ2
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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

Example: Find mean and variance for x = the number of attendees who
become clients given in the previous example
Mean:
X
µ = E (x) = xi p(xi )
= 0(0.05) + 1(0.10) + 2(0.20) + 3(0.25) + 4(0.15) + 5(0.15) + 6(0
= 3.2 attendees who become clients

Variance:
X
σ 2 = E [(x − µ)2 ] = (xi − µ)2 p(xi )
= (0 − 3.2)2 (0.05) + (1 − 3.2)2 (0.10) + (2 − 3.2)2 (0.20) + (3 − 3.
= 2.66

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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

Binomial Distribution
Binomial distribution deals with consecutive trials, each of which has
two possible outcomes
The outcomes can be identified in general terms, such as “success”
versus “failure” or “yes” versus “no,” or by more specific labels, such
as “milk in the refrigerator” versus “no milk in the refrigerator.”
The binomial distribution relies on what is known as the Bernoulli
process

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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

Characteristics of a Bernoulli Process:

1 There are two or more consecutive trials
2 In each trial, there are just two possible outcomes—usually denoted
as success or failure
3 The trials are statistically independent; that is, the outcome in any
trial is not affected by the outcomes of earlier trials, and it does not
affect the outcomes of later trials
4 The probability of a success remains the same from one trial to the
next

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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

In the binomial distribution, the discrete random variable, x, is the

number of successes that occur in n consecutive trials of the Bernoulli
process
The binomial probability distribution:
The probability of exactly x successes in n trials is
n!
p(x) = π x (1 − π)n−x
x!(n − x)!

where n = number of trials, x = number of successes

π - the probability of success in any given trial
(1 - π ) = the probability of failure in any given trial
Mean:
µ = E (x) = nπ

Variance:
σ 2 = E [(x − µ)2 ] = nπ(1 − π)
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Example: Of the 18,000,000 part-time workers in the United States, 20%
participate in retirement benefits. A group of 5 people is to be randomly
selected from this group, and the discrete random variable is x = the
number of persons in the group who participate in retirement benefits
a) What is the expected value of x?
b) What is the probability that the group Will Include Exactly Two
participants?
Solution: This example can be considered a Bernoulli process, with n = 5
trials and π= 0.2. The size of the population (N = 18,000,000) is
extremely large compared to the number of trials, so π can be assumed to
be constant from one trial to the next. A worker either participates in
retirement benefits or does not participate, so there are only two possible
outcomes for each of the 5 trials
a) The expected number of people in the group who participate can be
calculated as E(x) = nπ = 5(0.2)=1
b) Using the binomial formula, with n = 5, π = 0.2, and (1 - π) = (1.0 -
0.2) = 0.8, the probability of x = exactly 2 participants is
5!
p(x = 2) = (0.2)2 (0.8)5−2 = 0.205
2!(5 − 2)!
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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

Hypergeometric Distribution
The hypergeometric probability distribution is similar to the binomial
in focusing on the number of successes in a given number of
consecutive trials
But there are two major differences
1 The consecutive trials are not independent; that is, the outcome in a
trial can be affected by the outcomes in earlier trials
2 The probability of success does not remain constant from one trial to
the next
Unlike the binomial distribution, the hypergeometric distribution does
not rely on a Bernoulli process

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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

The hypergeometric distribution:

The probability of exactly x successes in n trials that are not independent is
s N−s



x n−x
p(x) = N


n

Where N=size of the population, n=size of the sample

s=number of successes in the population, x=number of successes in the
sample
Mean:
ns
µ = E (X ) =
N
Variance:
ns(N − s) N − n
σ 2 = E [(x − µ)2 ] =
N2 N −1
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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

Example: Twenty businesses located in a small community have filed tax

returns for the preceding year. Six of the returns were filled out incorrectly.
An Internal Revenue Service (IRS) auditor randomly selects four returns
for further examination, and the random variable is x 5 the number of
examined returns that are incorrectly filled out
a) What is the expected value of x
b) What is the probability that there will be exactly two incorrect returns
among the four that are chosen for further examination?
Solution:
a) For a sample size of n = 4, with s = 6 incorrect returns in the
population, and a population size of N = 20, the expected number of
incorrect returns in the sample is
ns 4(6)
E (x) = = = 1.20 incorrect returns
N 20
b)   
6 20−6
2 4−2
p(x = 2) =   = 0.2817
20
4

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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

Poisson Distribution
The Poisson distribution is a discrete probability distribution that is
applied to events for which the probability of occurrence over a given
span of time, space, or distance is extremely small
The discrete random variable, x, is the number of times the event
occurs over the given span, and x can be 0, 1, 2, 3, and so on,
with(theoretically) no upper limit
The mean of the Poisson distribution is denoted by λ(lambda) and it
is numerically equal to its variance

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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

The Poisson distribution:

The probability that an event will occur exactly x times over a given span of time, space, or distance is

λx e −λ
p(x) =
x!

Where λ=the mean, or E(x); the expected number of occurrences over the given span and e = the mathematical constant,
2.71828 (e is the base of the natural logarithm system)
(Note: In the Poisson distribution, the mean and the variance are equal.)

The Poisson Approximation to the Binomial Distribution

When n is relatively large and π (the probability of a success in a
given trial) is small, the binomial distribution can be closely
approximated by the Poisson distribution
As a rule of thumb, the binomial distribution can be satisfactorily
approximated by the Poisson whenever n≥20 and π ≤0.05
Under these conditions, we can just use λ=nπ and find the
probability of each value of x using the Poisson distribution
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Chapter Four: Probability and Probability Distributions
Discrete Probability Distributions

Example: In an urban county, health care officials anticipate that the

number of births this year will be the same as last year, when 438 children
were born—an average of 438/365, or 1.2 births per day. Daily births have
been distributed according to the Poisson distribution
a) What Is the Mean of the Distribution?
b) For any given day, what is the probability that no children will be born?
Solution:
a) Mean = E(x) = λ=1.2
b)
1.20 × e −1.2 0.30119
p(x = 0) = = = 0.3012
0! 1

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Continuous probability distributions describe probabilities associated

with random variables that are able to assume any of an infinite
number of values along an interval.
Discrete probability distributions can be expressed as histograms,
where the probabilities for the various x values are expressed by the
heights of a series of vertical bars
In contrast, continuous probability distributions are smooth curves,
where probabilities are expressed as areas under the curves
The curve is a function of x, and f(x) is referred to as a probability
density function
Since the continuous random variable x can be in an infinitely small
interval along a range or continuum, the probability that x will take
on any exact value may be regarded as zero
Therefore, we can speak of probabilities only in terms of the
probability that x will be within a specified interval of values
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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

The probability distribution for a continuous random variable:

1 The vertical coordinate is a function of x, described as f(x) and
referred to as the probability density function
2 The range of possible x values is along the horizontal axis
3 The probability that x will take on a value between a and b will be
the area under the curve between points a and b

4 The total area under the curve will be equal to 1.0

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Normal Distribution
The normal distribution is the most important continuous distribution
in statistics for the following reasons
1 Many natural and economic phenomena tend to be approximately
normally distributed
2 It can be used in approximating other distributions, including the
binomial
3 Sample means and proportions tend to be normally distributed
whenever repeated samples are taken from a given population of any
shape

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

The normal distribution is really a family of distributions, each

member of which is bell shaped and symmetrical (the left side is a
mirror image of the right)

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

The normal distribution for the continuous random variable, x (with

-∞ ≤ x ≤ ∞):
1 1 x−µ 2
f (x) = √ e − 2 [( σ )]
σ π
Where
µ=mean
σ = standard deviation
e= the mathematical constant, 2.71828
π= the mathematical constant, 3.14159

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Example: The General Aviation Manufacturers Association has reported

the average annual number of hours flown by general-aviation aircraft to
be approximately 120 hours. For purposes of our example, we will assume
a normal distribution and a standard deviation of 30 hours for the flying
hours of aircraft within this population
Solution: Based on the reported mean, µ = 120 hours, and the assumed
standard deviation, σ = 30 hours, we can use the known properties of the
normal distribution to determine that about 95.5% of these aircraft logged
between (120 - 2[30]) and (120 + 2[30]) hours, or between 60 and 180
hours of flying time during that year. Likewise, we could determine that
about 68.3% of the aircraft logged between 90 and 150 (µ ± σ) hours and
that about 99.7% logged between 30 and 210 (µ ± 3σ) hours

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Standard Normal Distribution

Standard (standardized) normal distribution is obtained by
“standardizing” the normal curve and expressing the original x values
in terms of their number of standard deviations away from the mean
it allows us to use a single table to describe areas beneath the curve
The z-score for a standard normal distribution:
x −µ
z=
σ
Where
z = the distance from the mean, measured in standard deviation units
x = the value of x in which we are interested
µ = the mean of the distribution
σ = the standard deviation of the distribution

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Using the Standard Normal Distribution Table

Regardless of the units involved (e.g., pounds, hours, dollars, and so
on) in the original normal distribution, the standard normal
distribution converts them into standard deviation distances from the
mean
The following are the steps to use of the standard normal distribution
table
1 Convert the information provided into one or more z-scores
2 Use the standard normal table to identify the area(s) corresponding to
the z-score(s)
3 Interpret the result in such a way as to answer the original question
In z-table, the row labels refer to the integer and first decimal place of
z, and the column labels refer to the second decimal place

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Using the Standard Normal Distribution Table

Examples:
1 Cumulative area associated with z = -1.37: Referring to the -1.3 row
and the 0.07 column of the z-table, we find this probability is 0.0853
2 Cumulative area associated with z = -0.08: Referring to the -0.0 row
and the 0.08 column of the z-table, we find this probability is 0.4681
3 Cumulative area associated with z = 0.09: Referring to the 0.0 row
and the 0.09 column of the z-table, we see this probability is 0.5359
4 Cumulative area associated with z = 1.73: Referring to the 1.7 row
and the 0.03 column of the z-table, we see this probability is 0.9582

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Normal Probabilities
Examples:
1) Following their production, industrial generator shafts are tested for
static and dynamic balance, and the necessary weight is added to
predrilled holes in order to bring each shaft within balance specifications.
From past experience, the amount of weight added to a shaft has been
normally distributed, with an average of 35 grams and a standard
deviation of 9 grams
a) What is the probability that a randomly selected shaft will require
between 35 and 40 grams of weight for proper balance?
b) What is the probability that a randomly selected shaft will require at
east 50 grams of weight for proper balance?
c) What is the probability that a randomly selected shaft will require
between 41 and 49 grams of weight for proper balance?
d) What is the probability that a randomly selected shaft will require no
more than 26 grams of weight for proper balance?
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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Normal Probabilities
2) In the setting just described, the average amount of weight added to
the generator shafts was 35 grams, with a standard deviation of 9 grams.
Lower weights are more desirable, and management has just directed that
the best 5% of the output be reserved for shipment to aerospace
customers. Translating “the best 5%” into an amount of balancing
weight, what weight cutoff should be used in deciding which generator
shafts to reserve for aerospace customers?
Solution:
1) a) P(35 ≤ x ≤ 40)= p( 35−35 9 ≤ z ≤
40−35
9 )=p(0.00≤ z ≤ 0.56)
=0.7123 - 0.5000 = 0.2123
b) P(x ≥ 50)=P(z ≥ 50−35 9 )= P(z ≥1.67)= 1.0000 - 0.9525 = 0.0475

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Normal Probabilities
c) P(41 ≤ x ≤ 49)=p( 41−35 9 ≤ z≤
49−35
9 = p(0.67≤ z ≤ 1.56)
= 0.9406 - 0.7486 = 0.1920
d) P(x ≤ 26)=p(z≤ 26−35 9 )=p(z≤-1.00)=0.1587
2) The quantity to be determined is the amount of weight (w) such that
only 5% of the shafts require no more than w grams. Expressed in
probability terms, the value of w must be such that P(x ≤ w) = 0.05
The solution is to find out what value of z corresponds to a cumulative
area of 0.05, then convert this z value into w grams
Of the values listed in the standard normal table, we see that the
cumulative area to z = -1.64 is 0.0505, while the cumulative area to z =
-1.65 is 0.0495. Interpolating between the two, the number of grams in
the cutoff corresponds to z = -1.645
Then, z= w σ−µ implies -1.645= w −35
9
Therefore, w = 35 - 9(1.645) = 20.195 grams
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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

The Normal Approximation to the Binomial Distribution

The binomial distribution is symmetrical whenever the population
proportion, π is 0.5 and approaches symmetry for values that are
close to 0.5
In addition, whenever the number of trials, n, becomes larger, the
binomial distribution takes on a bell-shaped appearance that
resembles very closely the normal distribution
Although the binomial distribution is discrete and the normal
distribution is continuous, the normal distribution is a very good
approximation to the binomial whenever both nπ and n(1-π) are ≥5

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

The mean and standard deviation of the binomial distribution are the
basis for the normal distribution that will be used in making the
approximation
Mean:
µ = nπ
Standard Deviation: p
σ= nπ(1 − π)
Where
n = the number of trials
π = the probability of success on any given trial
x = the number of successes in n trials

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Exponential Distribution
In the Poisson distribution the discrete random variable is the number
of rare events occurring during a given interval of time, space, or
distance
For a Poisson process, a distribution called the exponential
distribution describes the continuous random variable, x 5 the amount
of time, space, or distance between occurrences of these rare events
The exponential distribution assumes that the arrivals are
independent from one another
The mean of the exponential distribution is the inverse of that of the
Poisson
Note that the Poisson random variable is discrete (number of
persons), whereas the random variable for the exponential distribution
is continuous
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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

The exponential distribution:

For x 5 the length of the interval between occurrences:

f (x) = λe −λx for x > 0 and λ > 0

Where
λ = the mean and variance of a Poisson distribution
1/λ =the mean and standard deviation of the corresponding
exponential distribution
e = the mathematical constant, 2.71828, the base of the natural
logarithm system
Areas beneath the curve:

p(x ≥ k) = e −λk

Where k = the time, space, or distance until the next

occurrence
Belay Desyebelew (AAU)
Basic Statistics (For Accounting and Finance) February, 2022 124 / 126
Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

Example: Calls to the “911” emergency number of a large community

have been found to be Poisson distributed with an average of 10 calls per
hour
a) Determine the mean and standard deviation of the corresponding
exponential distribution
b) What is the probability that the next call will occur at least 5 minutes
from now?
c) What is the probability that the next call will occur between 3 and 8
minutes from now?
Solution:
a) The mean of the Poisson distribution is λ = 10 calls per hour, and the
mean of the corresponding exponential distribution is the inverse of this,
1/λ = 1/10, or 0.10 hours between calls. The standard deviation is
numerically equal to the mean=0.10

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Chapter Four: Probability and Probability Distributions
Continuous Probability Distributions

b) The mean of the Poisson distribution is 10 calls per 60 minutes, or λ =

1/6 calls per minute. The mean of the corresponding exponential
distribution is 1/λ = 6 minutes between calls
P(x ≥ 5) = e (−1/6) (5) = 2.71828−0.833 or 0.4347
There is a 0.4347 chance that at least 5 minutes will elapse before the
next call is received. Alternatively, the probability that the next call will
occur within the next 5 minutes is (1.000 - 0.4347), or 0.5653
c) The area beneath the curve in the interval 3 ≤ x ≤ 8 can be
determined by subtracting the area representing x ≤ 8 from the area
representing x ≤ 3
p(3 ≤ x ≤ 8)= p(x ≤ 3)-p(x ≤ 8)=e −(1/6)(3) - e −(1/6)(8)
=2.71828−0.500 - 2.71828−1.333 = 0.6065 - 0.2637 = 0.3428

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