Statistics for

Business and Economics

8th Global Edition

Chapter 4

Discrete Probability Distributions

Copyright © 2013 Pearson Education Ch. 4-1

 Chapter Goals
After completing this chapter, you should be
able to:
 Interpret the mean and standard deviation for a discrete
random variable
 Use the binomial probability distribution to find
probabilities
 Describe when to apply the binomial distribution
 Use the hypergeometric and Poisson discrete probability
distributions to find probabilities
 Explain covariance and correlation for jointly distributed
discrete random variables
 Explain an application to portfolio investment

Copyright © 2013 Pearson Education Ch. 4-2

Probability models have extensive application to a number
of business problems, and many of these applications are
developed here.

We begin with some important definitions and then move to

developing several important models that are used
extensively in business and economic applications.

Copyright © 2013 Pearson Education Ch. 4-3

4.1
Random Variables

 Random Variable
 Represents a possible numerical value from

a random experiment
Random
Variables

Ch. 4 Discrete Continuous Ch. 5

Random Variable Random Variable

Copyright © 2013 Pearson Education Ch. 4-4

It is important to distinguish between a random variable and
the possible values that it can take.

Using notation, this is done with capital letters, such as X, to

denote the random variable and the corresponding lowercase
letter, x, to denote a possible value.

Copyright © 2013 Pearson Education Ch. 4-5

 Discrete Random Variable
 Takes on no more than a countable number of
values
Examples:

 Roll a die twice

Let X be the number of times 4 comes up
(then x could be 0, 1, or 2 times)

 Toss a coin 5 times.

Let X be the number of heads
(then x = 0, 1, 2, 3, 4, or 5)
Copyright © 2013 Pearson Education Ch. 4-6
It follows from the definition that any random variable that can
take on only a finite number of values is discrete.

For example, the number of sales resulting from 10 customer

contacts is a discrete random variable. Even if the number of
possible outcomes is infinite but countable, the random
variable is discrete

Copyright © 2013 Pearson Education Ch. 4-7

 Continuous Random Variable
 Can take on any value in an interval
 Possible values are measured on a continuum

Examples:

 Weight of packages filled by a mechanical filling

process
 Temperature of a cleaning solution
 Time between failures of an electrical component

Copyright © 2013 Pearson Education Ch. 4-8

A store sells from 0 to 12 computers per day. Is the
amount of daily computer sales a discrete or continuous
random variable?

Copyright © 2013 Pearson Education Ch. 4-9

For each of the following, indicate if a discrete or a continuous
random variable provides the best definition:

a. The number of cars that arrive each day for repair

in a two-person repair shop

b. The number of cars produced annually by General Motors

c. The number of passengers that are bumped from a specific

airline flight 3 days before Christmas

Copyright © 2013 Pearson Education Ch. 4-10

4.2
Probability Distributions for
Discrete Random Variables
Let X be a discrete random variable and x be one
of its possible values
 The probability that random variable X takes
specific value x is denoted P(X = x)
 The probability distribution function of a
random variable is a representation of the
probabilities for all the possible outcomes.
 Can be shown algebraically, graphically, or
with a table

Copyright © 2013 Pearson Education Ch. 4-11

 Probability Distributions for
Discrete Random Variables
Experiment: Toss 2 Coins. Let X = # heads.
Show P(x) , i.e., P(X = x) , for all values of x:

4 possible outcomes
Probability Distribution
T T x Value Probability
0 1/4 = .25

T H 1 2/4 = .50
2 1/4 = .25

H T
Probability

.50

.25
H H
Copyright © 2013 Pearson Education
0 1 2 x Ch. 4-12
 Probability Distribution
Required Properties

 0 ≤ P(x) ≤ 1 for any value of x

 The individual probabilities sum to 1;

 P(x)  1
x

(The notation indicates summation over all possible x values)

Copyright © 2013 Pearson Education Ch. 4-13

Property 1 merely states that probabilities cannot be negative
or exceed 1.

Property 2 follows from the fact that the events “X = x,” for all
possible values of x, are mutually exclusive and collectively
exhaustive.

The probabilities for these events must, therefore, sum to 1. It

is simply a way of saying that when a random experiment is to
be carried out, something must happen.

Copyright © 2013 Pearson Education Ch. 4-14

 Cumulative Probability Function

 The cumulative probability function, denoted

F(x0), shows the probability that X does not
exceed the value x0

F(x0 )  P(X  x 0 )

Where the function is evaluated at all values of x0

Copyright © 2013 Pearson Education Ch. 4-15

Example 4.2 Automobile Sales (Probabilities)

Olaf Motors, Inc., is a car dealer in a small southern town. Based on an

analysis of its sales history, the managers know that on any single day the
number of Prius cars sold can vary from 0 to 5. How can the probability
distribution function shown in Table 4.2 be used for inventory planning?

Copyright © 2013 Pearson Education Ch. 4-16

Copyright © 2013 Pearson Education Ch. 4-17
 Derived Relationship
The derived relationship between the probability
distribution and the cumulative probability distribution

 Let X be a random variable with probability distribution

P(x) and cumulative probability distribution F(x0). Then

F(x 0 )  P(x)
xx0

(the notation implies that summation is over all possible

values of x that are less than or equal to x0)

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 4-18
 Derived Properties
Derived properties of cumulative probability
distributions for discrete random variables

 Let X be a discrete random variable with cumulative

probability distribution F(x0). Then

1. 0 ≤ F(x0) ≤ 1 for every number x0

2. for x0 < x1, then F(x0) ≤ F(x1)

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 4-19
 Basic Exercises

Q1) Show the probability distribution function of the number

of heads when three fair coins are tossed independently.

Copyright © 2013 Pearson Education Ch. 4-20

Q2) In a geography assignment the grade obtained is the random variable
X. It has been found that students have these probabilities of getting a
specific grade:

A: 0.18 D: 0.07
B: 0.32 E: 0.03
C: 0.25 F: 0.15

Based on this, calculate the following.

a. The cumulative probability distribution of X.

b. The probability of getting a higher grade than B.

c. The probability of getting a lower grade than C.

Copyright © 2013 Pearson Education Ch. 4-21
 Properties of
Discrete Random Variables

In order to obtain a measure of the center of a probability

distribution, we introduce the notion of the expectation of a
random variable.

In order to obtain a sensible measure of central location, we

weight the various possible outcomes by the probabilities of
their occurrence.

Copyright © 2013 Pearson Education Ch. 4-22

4.3
Properties of
Discrete Random Variables
 Expected Value (or mean) of a discrete
random variable X:
E[X]  μ   xP(x)
x

 Example: Toss 2 coins, x P(x)

x = # of heads, 0 .25
compute expected value of x: 1 .50
2 .25
E(x) = (0 x .25) + (1 x .50) + (2 x .25)
= 1.0

Copyright © 2013 Pearson Education Ch. 4-23

Copyright © 2013 Pearson Education Ch. 4-24
Copyright © 2013 Pearson Education Ch. 4-25
 Variance and
Standard Deviation
 Variance of a discrete random variable X

σ 2  E[(X  μ)2 ]   (x  μ)2 P(x)

x
Can also be expressed as

σ 2  E[X 2 ]  μ2   x 2 P(x)  μ2
x

 Standard Deviation of a discrete random variable X

σ σ  2
 (x  μ) P(x)
x
2

Copyright © 2013 Pearson Education Ch. 4-26

 Standard Deviation Example

 Example: Toss 2 coins, X = # heads,

compute standard deviation (recall E[X] = 1)

σ x
(x  μ) 2
P(x)

σ  (0  1)2 (.25)  (1  1)2 (.50)  (2  1)2 (.25)  .50  .707

Possible number of heads

= 0, 1, or 2

Copyright © 2013 Pearson Education Ch. 4-27

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 4-28
 Functions of Random Variables

 If P(x) is the probability function of a discrete

random variable X , and g(X) is some function of
X , then the expected value of function g is

E[g(X)]   g(x)P(x)
x

Copyright © 2013 Pearson Education Ch. 4-29

 Linear Functions
of Random Variables
(continued)
 Let random variable X have mean µx and variance σ2x
 Let a and b be any constants.
 Let Y = a + bX
 Then the mean and variance of Y are
μY  E(a  bX)  a  bμX

σ 2
Y  Var(a  bX)  b σ
2 2
X

 so that the standard deviation of Y is

σY  b σX

Copyright © 2013 Pearson Education Ch. 4-30

Example 4.5 Total Project Cost (Computations for Functions of Random
Variables)

A contractor is interested in the total cost of a project on which she intends to bid.
She estimates that materials will cost $25,000 and that her labor will be $900 per day.
If the project takes X days to complete, the total labor cost will be 900X dollars, and
the total cost of the project (in dollars) will be as follows:

C = 25,000 + 900X

Using her experience the contractor forms probabilities (Table 4.4) of likely
completion times for the project.

a. Find the mean and variance for completion time X.

b. Find the mean, variance, and standard deviation for total cost C.

Copyright © 2013 Pearson Education Ch. 4-31

Copyright © 2013 Pearson Education Ch. 4-32
 Properties of Linear Functions
of Random Variables

 Let a and b be any constants.

 a) E(a)  a and Var(a)  0

i.e., if a random variable always takes the value a,

it will have mean a and variance 0

 b) E(bX)  bμX and Var(bX)  b σ

2 2
X

i.e., the expected value of b·X is b·E(x)

Copyright © 2013 Pearson Education Ch. 4-33

Example: A factory manager is considering whether to replace a
temperamental machine. A review of past records indicates the following
probability distribution for the number of breakdowns of this machine in a
week.

a. Find the mean and standard deviation of the number of weekly

breakdowns.

b. It is estimated that each breakdown costs the company $1,500 in lost

output. Find the mean and standard deviation of the weekly cost to
the company from breakdowns of this machine.
Copyright © 2013 Pearson Education Ch. 4-34
 Breakdowns P(x) Mean Variance
0 0.1 0 0.33124
1 0.26 0.26 0.174824
2 0.42 0.84 0.013608
3 0.16 0.48 0.222784
4 0.06 0.24 0.285144
1.00 1.82 1.0276
S.D. 1.013706

Copyright © 2013 Pearson Education Ch. 4-35

 Probability Distributions
Probability
Distributions

Ch. 4 Discrete Continuous Ch. 5

Probability Probability
Distributions Distributions

Binomial Uniform

Poisson Normal

Hypergeometric Exponential

Copyright © 2013 Pearson Education Ch. 4-36

4.4
The Binomial Distribution
Probability
Distributions

Discrete
Probability
Distributions

Binomial

Hypergeometric

Poisson

Copyright © 2013 Pearson Education Ch. 4-37

 Bernoulli Distribution

 Consider only two outcomes: “success” or “failure”

 Let P denote the probability of success
 Let 1 – P be the probability of failure
 Define random variable X:
x = 1 if success, x = 0 if failure
 Then the Bernoulli probability distribution is

P(0)  (1 P) and P(1)  P

Copyright © 2013 Pearson Education Ch. 4-38

 Mean and Variance of a
Bernoulli Random Variable

 The mean is µx = P

μx  E[X]   xP(x)  (0)(1  P)  (1)P  P

X

 The variance is σ2x = P(1 – P)

σ  E[(X  μx ) ]   (x  μx ) P(x)
2
x
2 2

 (0  P)2 (1  P)  (1  P)2 P  P(1 P)

Copyright © 2013 Pearson Education Ch. 4-39
Example 4.6 Contract Sale (Compute Bernoulli Mean and Variance)

Shirley Ferguson, an insurance broker, believes that for a particular

contact the probability of making a sale is 0.4. If the random variable X is
defined to take the value 1 if a sale is made and 0 otherwise, then X has a
Bernoulli distribution with probability of success P equal to 0.4.

Find the mean and the variance of the distribution.

Copyright © 2013 Pearson Education Ch. 4-40

 Developing the Binomial Distribution

Suppose that Shirley in Example 4.6 seeks a total of, x = 3 sales and to do
this she contacts four n = 4 potential customers. She would like to know
the probability of exactly 3 sales out of the 4 contacts. If we label a sale as
(S) and a nonsale as (F), one possible sequence that results in 3 sales
would be [S, S, S, F]. Given that each customer contact is independent, the
probability of this particular event is as follows:

(0.40  0.40  0.40  0.6)  0.4030.601  0.0384

The sequences of S and F can be arranged in combinations of 4 outcomes

taken 3 at a time, as developed in Chapter 3, and thus there are

4!
C 
4
4
3!(4  3)!
3

Copyright © 2013 Pearson Education Ch. 4-41

possible ways that she can obtain 3 sales, and thus the probability of
exactly 3 sales would be

C34 0.4030.601  4  0.0384  0.1536

Copyright © 2013 Pearson Education Ch. 4-42

 Developing the
Binomial Distribution

 The number of sequences with x successes in n

independent trials is:

n!
C 
n

x! (n  x)!
x

Where n! = n·(n – 1)·(n – 2)· . . . ·1 and 0! = 1

 These sequences are mutually exclusive, since no two

can occur at the same time

Copyright © 2013 Pearson Education Ch. 4-43

 Binomial Probability Distribution
 A fixed number of observations, n
 e.g., 15 tosses of a coin; ten light bulbs taken from a warehouse
 Two mutually exclusive and collectively exhaustive
categories
 e.g., head or tail in each toss of a coin; defective or not defective
light bulb
 Generally called “success” and “failure”
 Probability of success is P , probability of failure is 1 – P
 Constant probability for each observation
 e.g., Probability of getting a tail is the same each time we toss
the coin
 Observations are independent
 The outcome of one observation does not affect the outcome of
the other
Copyright © 2013 Pearson Education Ch. 4-44
 Possible Binomial Distribution
Settings

 A manufacturing plant labels items as

either defective or acceptable
 A firm bidding for contracts will either get a
contract or not
 A marketing research firm receives survey
responses of “yes I will buy” or “no I will
not”
 New job applicants either accept the offer
or reject it
Copyright © 2013 Pearson Education Ch. 4-45
 The Binomial Distribution

n! X nX
P(x)  P (1- P)
x ! (n  x )!
P(x) = probability of x successes in n trials,
with probability of success P on each trial
Example: Flip a coin four
times, let x = # heads:
x = number of ‘successes’ in sample,
n=4
(x = 0, 1, 2, ..., n)
n = sample size (number of independent P = 0.5
trials or observations) 1 - P = (1 - 0.5) = 0.5
P = probability of “success” x = 0, 1, 2, 3, 4

Copyright © 2013 Pearson Education Ch. 4-46

 Example:
Calculating a Binomial Probability
What is the probability of one success in five
observations if the probability of success is 0.1?
x = 1, n = 5, and P = 0.1

n!
P(x  1)  P X (1  P)n X
x! (n  x)!
5!
 (0.1)1(1  0.1) 51
1! (5  1)!
 (5)(0.1)(0 .9) 4
 .32805
Copyright © 2013 Pearson Education Ch. 4-47
 Shape of Binomial Distribution
 The shape of the binomial distribution depends on the
values of P and n
Mean P(x) n = 5 P = 0.1
.6
 Here, n = 5 and P = 0.1 .4
.2
0 x
0 1 2 3 4 5

P(x) n = 5 P = 0.5
 Here, n = 5 and P = 0.5 .6
.4
.2
0 x
0 1 2 3 4 5
Copyright © 2013 Pearson Education Ch. 4-48
 Mean and Variance of a
Binomial Distribution

Mean

μ  E(x)  nP
 Variance and Standard Deviation
σ  nP(1- P)
2

σ  nP(1- P)
Where n = sample size
P = probability of success
(1 – P) = probability of failure

Copyright © 2013 Pearson Education Ch. 4-49

 Binomial Characteristics
Examples
μ  nP  (5)(0.1)  0.5
Mean P(x) n = 5 P = 0.1
.6
.4
σ  nP(1- P)  (5)(0.1)(1  0.1) .2
 0.6708 0 x
0 1 2 3 4 5

μ  nP  (5)(0.5)  2.5 P(x) n = 5 P = 0.5

.6
.4
σ  nP(1- P)  (5)(0.5)(1  0.5) .2
 1.118 0 x
0 1 2 3 4 5

Copyright © 2013 Pearson Education Ch. 4-50

Example 4.7 Multiple Contract Sales

Suppose that a real estate agent, Jeanette Nelson, has 5 contacts, and
she believes that for each contact the probability of making a sale is
0.40. Using Equation 4.18, do the following:

a. Find the probability that she makes at most 1 sale.

b. Find the probability that she makes between 2 and 4 sales (inclusive).

c. Graph the probability distribution function.

Copyright © 2013 Pearson Education Ch. 4-51

Copyright © 2013 Pearson Education Ch. 4-52
Copyright © 2013 Pearson Education Ch. 4-53
Copyright © 2013 Pearson Education Ch. 4-54
Example 4.8 College Admissions

Early in August an undergraduate college discovers that it can accommodate a few

extra students. Enrolling those additional students would provide a substantial
increase in revenue without increasing the operating costs of the college; that is,
no new classes would have to be added. From past experience the college knows
that the frequency of enrollment given admission for all students is 40%.

a. What is the probability that at most 6 students will enroll if the college offers
admission to 10 more students?

b. What is the probability that more than 12 will actually enroll if admission is
offered to 20 students?

c. If the frequency of enrollment given admission for all students was 70%, what is
the probability that at least 12 out of 15 students will actually enroll?

Copyright © 2013 Pearson Education Ch. 4-55

Solution
a. We assume that the additional students admitted have the same probability of
enrolling as the previously admitted students.

The probability can be obtained using the cumulative binomial probability

distribution from Table 3 in the appendix. The probability of at most 6 students
enrolling if n = 10 and P = 0.40 is as follows:

P(X<=6| n = 10, P = 0.40) = 0.945

b) P(X>12| n=20, p=0.40) = 1-P(X<=12) = 1- 0.979 =0.021

c) The probability that at least 12 out of 15 students enroll is the same as the
probability that at most 3 out of 15 students do not enroll (the probability of a
student not enrolling is 1 - 0.70 = 0.30).

P(X>=12| n=15, p=0.70) = P(X<=3| n=15, p=0.3) = 0.297

Copyright © 2013 Pearson Education Ch. 4-56

Copyright © 2013 Pearson Education Ch. 1-57
Copyright © 2013 Pearson Education Ch. 1-58
 Using Binomial Tables

N x … p=.20 p=.25 p=.30 p=.35 p=.40 p=.45 p=.50

10 0 … 0.1074 0.0563 0.0282 0.0135 0.0060 0.0025 0.0010
1 … 0.2684 0.1877 0.1211 0.0725 0.0403 0.0207 0.0098
2 … 0.3020 0.2816 0.2335 0.1757 0.1209 0.0763 0.0439
3 … 0.2013 0.2503 0.2668 0.2522 0.2150 0.1665 0.1172
4 … 0.0881 0.1460 0.2001 0.2377 0.2508 0.2384 0.2051
5 … 0.0264 0.0584 0.1029 0.1536 0.2007 0.2340 0.2461
6 … 0.0055 0.0162 0.0368 0.0689 0.1115 0.1596 0.2051
7 … 0.0008 0.0031 0.0090 0.0212 0.0425 0.0746 0.1172
8 … 0.0001 0.0004 0.0014 0.0043 0.0106 0.0229 0.0439
9 … 0.0000 0.0000 0.0001 0.0005 0.0016 0.0042 0.0098
10 … 0.0000 0.0000 0.0000 0.0000 0.0001 0.0003 0.0010

Examples:
n = 10, x = 3, P = 0.35: P(x = 3|n =10, p = 0.35) = .2522
n = 10, x = 8, P = 0.45: P(x = 8|n =10, p = 0.45) = .0229

Copyright © 2013 Pearson Education Ch. 4-59

Example 4.9 Sales of Airline Seats

Suppose that you are in charge of marketing airline seats for a major carrier. Four
days before the flight date you have 16 seats remaining on the plane. You know
from past experience data that 80% of the people that purchase tickets in this
time period will actually show up for the flight.

a. If you sell 20 extra tickets, what is the probability that you will overbook the
flight or have at least 1 empty seat?

b. If you sell 18 extra tickets, what is the probability that you will overbook the
flight or have at least 1 empty seat?

Copyright © 2013 Pearson Education Ch. 4-60

Copyright © 2013 Pearson Education Ch. 4-61
Copyright © 2013 Pearson Education Ch. 4-62
Ex: A production manager knows that 5% of components produced by a
particular manufacturing process have some defect. Six of these components,
whose characteristics can be assumed to be independent of each
other, are examined.

a. What is the probability that none of these components has a defect?

b. What is the probability that one of these components has a defect?

c. What is the probability that at least two of these components have a defect?

Copyright © 2013 Pearson Education Ch. 4-63

 Cumulative Distribution Function
Binomial with n = 6 and p = 0.0500000

x P( X <= x )
0.00 0.7351
1.00 0.9672
2.00 0.9978
3.00 0.9999
4.00 1.0000
5.00 1.0000

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 4-64
4.5
The Poisson Distribution
Probability
Distributions

Discrete
Probability
Distributions

Binomial

Poisson

Hypergeometric

Copyright © 2013 Pearson Education Ch. 4-65

 The Poisson Distribution

 The Poisson distribution is used to determine the

probability of a random variable which characterizes
the number of occurrences or successes of a certain
event in a given continuous interval (such as time,
surface area, or length).

Copyright © 2013 Pearson Education Ch. 4-66

 The Poisson Distribution
(continued)

 Assume an interval is divided into a very large number of

equal subintervals where the probability of the occurrence
of an event in any subinterval is very small.
Poisson distribution assumptions
1. The probability of the occurrence of an event is constant
for all subintervals.
2. There can be no more than one occurrence in each
subinterval.
3. Occurrences are independent; that is, an occurrence in
one interval does not influence the probability of an
occurrence in another interval.

Copyright © 2013 Pearson Education Ch. 4-67

 Poisson Distribution Function
The expected number of events per unit is the
parameter  (lambda), which is a constant that
specifies the average number of occurrences
(successes) for a particular time and/or space
λ
e λ x
P(x) 
x!
where:
P(x) = the probability of x successes over a given time or
space, given 
 = the expected number of successes per time or space unit,  > 0
e = base of the natural logarithm system (2.71828...)

Copyright © 2013 Pearson Education Ch. 4-68

 Poisson Distribution
Characteristics
Mean and variance of the Poisson distribution

 Mean μx  E[X]  λ
 Variance and Standard Deviation
σ  E[(X  μx ) ]  λ
2
x
2

σ λ
where  = expected number of successes per time or space unit

Copyright © 2013 Pearson Education Ch. 4-69

Example 4.10 System Component Failure (Poisson Probabilities)

Andrew Whittaker, computer center manager, reports that his computer system
experienced three component failures during the past 100 days.

a. What is the probability of no failures in a given day?

b. What is the probability of one or more component failures in a given day?

c. What is the probability of at least two failures in a 3-day period?

Copyright © 2013 Pearson Education Ch. 4-70

Copyright © 2013 Pearson Education Ch. 4-71
Copyright © 2013 Pearson Education Ch. 4-72
Example 4.11 Customers at a Photocopying Machine (Poisson Probability)

Customers arrive at a photocopying machine at an average rate of 2 every

five minutes. Assume that these arrivals are independent, with a constant
arrival rate, and that this problem follows a Poisson model, with X denoting
the number of arriving customers in a 5-minute period and mean λ = 2. Find
the probability that more than two customers arrive in a 5-minute period.

Copyright © 2013 Pearson Education Ch. 4-73

Copyright © 2013 Pearson Education Ch. 4-74
 Using Poisson Tables


X 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90

0 0.9048 0.8187 0.7408 0.6703 0.6065 0.5488 0.4966 0.4493 0.4066

1 0.0905 0.1637 0.2222 0.2681 0.3033 0.3293 0.3476 0.3595 0.3659
2 0.0045 0.0164 0.0333 0.0536 0.0758 0.0988 0.1217 0.1438 0.1647
3 0.0002 0.0011 0.0033 0.0072 0.0126 0.0198 0.0284 0.0383 0.0494
4 0.0000 0.0001 0.0003 0.0007 0.0016 0.0030 0.0050 0.0077 0.0111
5 0.0000 0.0000 0.0000 0.0001 0.0002 0.0004 0.0007 0.0012 0.0020
6 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0001 0.0002 0.0003
7 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Example: Find P(X = 2) if  = .50

e   X e 0.50 (0.50) 2
P( X  2)    .0758
X! 2!

Copyright © 2013 Pearson Education Ch. 4-75

 Graph of Poisson Probabilities
0.70

Graphically: 0.60

 = .50 0.50

= P(x) 0.40

X 0.50
0.30
0 0.6065
0.20
1 0.3033
2 0.0758 0.10

3 0.0126 0.00
0 1 2 3 4 5 6 7
4 0.0016
5 0.0002 x
6 0.0000
P(X = 2) = .0758
7 0.0000

Copyright © 2013 Pearson Education Ch. 4-76

 Poisson Distribution Shape

 The shape of the Poisson Distribution

depends on the parameter  :

0.70
 = 0.50 0.25
 = 3.00
0.60
0.20
0.50

0.15
0.40

P(x)
P(x)

0.30 0.10

0.20
0.05
0.10

0.00 0.00
0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 8 9 10 11 12

x x

Copyright © 2013 Pearson Education Ch. 4-77

 Poisson Approximation to the
Binomial Distribution
Let X be the number of successes from n independent
trials, each with probability of success P. The
distribution of the number of successes, X , is binomial,
with mean nP. If the number of trials, n , is large and nP
is of only moderate size (preferably nP ≤ 7 ), this
distribution can be approximated by the Poisson
distribution with  = nP. The probability distribution of
the approximating distribution is

e nP (nP) x
P(x)  for x  0,1,2,...
x!
Copyright © 2013 Pearson Education Ch. 4-78
Example 4.13 Probability of Bankruptcy (Poisson Probability)

An analyst predicted that 3.5% of all small corporations would file for
bankruptcy in the coming year. For a random sample of 100 small
corporations, estimate the probability that at least 3 will file for bankruptcy
in the next year, assuming that the analyst’s prediction is correct.

Copyright © 2013 Pearson Education Ch. 4-79

Copyright © 2013 Pearson Education Ch. 4-80
 Comparison of the Poisson and Binomial Distributions

if the problem uses a small sample of observations, then it is not possible

to find a limiting probability with n large, and, thus, the binomial is the
correct probability distribution.

Further, if we have a small sample and the probability of a success for a

single trial is between 0.05 and 0.95, then there is further support for
choosing the binomial.

However, if the set of cases that could be affected is very large—say,

several thousand—and the mean number of “successes” over that large
set of cases is small—say, fewer than 30—then there is strong support for
choosing the Poisson distribution.

Copyright © 2013 Pearson Education Ch. 4-81

Basic Questions

1) Determine the probability of exactly four successes

for a random variable with a Poisson distribution with
parameter λ = 2.4.

Copyright © 2013 Pearson Education Ch. 4-82

Copyright © 2013 Pearson Education Ch. 4-83
2) Determine the probability of fewer than or equal to 9
successes for a random variable with a Poisson
distribution with parameter λ = 8.0.

Copyright © 2013 Pearson Education Ch. 4-84

Copyright © 2013 Pearson Education Ch. 4-85
3) The number of accidents in a production facility has a
Poisson distribution with a mean of 2.6 per month.

a. For a given month what is the probability there

will be fewer than 2 accidents?

b. For a given month what is the probability there will

be more than 3 accidents?

Copyright © 2013 Pearson Education Ch. 4-86

Copyright © 2013 Pearson Education Ch. 4-87
4) A corporation has 250 personal computers. The
probability that any 1 of them will require repair in a given
week is 0.01.
Find the probability that fewer than 4 of the personal
computers will require repair in a particular week. Use the
Poisson approximation to the binomial distribution.

Copyright © 2013 Pearson Education Ch. 4-88

4.6
The Hypergeometric Distribution
Probability
Distributions

Discrete
Probability
Distributions

Binomial

Poisson

Hypergeometric

Copyright © 2013 Pearson Education Ch. 4-89

 The Hypergeometric Distribution

Sampling without replacement: An item drawn from the

small population is not replaced before the second item is
selected. Thus the probability of selection changes after
each succeeding selection. This change is particularly
important when the population is small relative to the size of
the sample.

Because the assumptions for the binomial are not met,

a different probability must be selected. This probability
distribution is the hypergeometric distribution.

Copyright © 2013 Pearson Education Ch. 4-90

If the population is large (N>10, 000) and the sample size
is small (<1%), then the change in probability after each
draw is very small. In those situations the binomial is a
very good approximation and is typically used.

Copyright © 2013 Pearson Education Ch. 4-91

 The Hypergeometric Distribution

 “n” trials in a sample taken from a finite

population of size N
 Sample taken without replacement
 Outcomes of trials are dependent
 Concerned with finding the probability of “X”
successes in the sample where there are “S”
successes in the population

Copyright © 2013 Pearson Education Ch. 4-92

 Hypergeometric
Probability Distribution

S! (N  S)!

CSxCNnxS x! (S  x)! (n  x)! (N  S  n  x)!
P(x)  N

Cn N!
n! (N  n)!
Where
N = population size
S = number of successes in the population
N – S = number of failures in the population
n = sample size
x = number of successes in the sample
n – x = number of failures in the sample
Copyright © 2013 Pearson Education Ch. 4-93
 Using the
Hypergeometric Distribution
■ Example: 3 different computers are checked from 10 in
the department. 4 of the 10 computers have illegal
software loaded. What is the probability that 2 of the 3
selected computers have illegal software loaded?
N = 10 n=3
S=4 x=2

CSxCNnxS C24C16 (6)(6)

P(x  2)  N
 10   0.3
Cn C3 120
The probability that 2 of the 3 selected computers have illegal
software loaded is 0.30, or 30%.
Copyright © 2013 Pearson Education Ch. 4-94
Example 4) Compute the probability of 7 successes in a
random sample of size n = 14 obtained from a population of
size N = 30 that contains 15 successes.

Copyright © 2013 Pearson Education Ch. 4-95

Example 5: A committee of 8 members is to be formed from
a group of 8 men and 8 women. If the choice of committee
members is made randomly, what is the probability that
precisely half of these members will be women?

Copyright © 2013 Pearson Education Ch. 4-96

Example 4.14 Shipment of Items

A company receives a shipment of 20 items. Because

inspection of each individual item is expensive, it has a policy
of checking a random sample of 6 items from such a shipment,
and if no more than 1 sampled item is defective, the remainder
will not be checked. What is the probability that a shipment of 5
defective items will not be subjected to additional checking?

Copyright © 2013 Pearson Education Ch. 4-97

Copyright © 2013 Pearson Education Ch. 4-98
When we work with probability models for problems involving
relationships between variables, it is important that the effect of these
relationships is included in the probability model.

For example, assume that a car dealer is selling the following

automobiles: (1) a red two-door compact, (2) a blue minivan, and (3) a
silver full-size sedan; the probability distribution for purchasing would
not be the same for women in their 20s, 30s, and 50s.

Thus, it is important that probability models reflect the joint effect of

variables on probabilities.

Copyright © 2013 Pearson Education Ch. 4-99

Example 4.15 Market Research (Joint Probabilities)

Sally Peterson, a marketing analyst, has been asked to develop a probability

model for the relationship between the sale of luxury cookware and age
group. This model will be important for developing a marketing campaign for
a new line of chef-grade cookware. She believes that purchasing patterns for
luxury cookware are different for different age groups.

Solution: To represent the market, Sally proposes to use three age groups—
16 to 25, 26 to 45, and 46 to 65—and two purchasing patterns—buy and not
buy. Next, she collects a random sample of persons for the age range 16 to
65 and records their age group and desire to purchase. The result of this data
collection is the joint probability distribution contained in Table 4.6. Table 4.6,
therefore, provides a summary of the probability of purchase and age group
that will be a valuable resource for marketing analysis.
Copyright © 2013 Pearson Education Ch. 4-100
Copyright © 2013 Pearson Education Ch. 4-101
4.7
Jointly Distributed
Discrete Random Variables

 A joint probability distribution is used to express the

probability that simultaneously X takes the specific
value x and Y takes the value y, as a function of x
and y

P(x, y)  P(X  x  Y  y)
 The marginal probability distributions are

P(x)   P(x, y) P(y)   P(x, y)

y x

Copyright © 2013 Pearson Education Ch. 4-102

 Properties of Joint
Probability Distributions

Properties of Joint Probability Distributions of Discrete

Random Variables

 Let X and Y be discrete random variables with joint

probability distribution P(x, y)

1. 0 ≤ P(x, y) ≤ 1 for any pair of values x and y

2. the sum of the joint probabilities P(x, y) over all
possible pairs of values must be 1

Copyright © 2013 Pearson Education Ch. 4-103

 Conditional Probability Distribution

 The conditional probability distribution of the random

variable Y expresses the probability that Y takes the
value y when the value x is specified for X.

P(x, y)
P(y | x) 
P(x)
 Similarly, the conditional probability function of X, given
Y = y is:
P(x, y)
P(x | y) 
P(y)

Copyright © 2013 Pearson Education Ch. 4-104

Copyright © 2013 Pearson Education Ch. 4-105
 Independence
 The jointly distributed random variables X and Y are
said to be independent if and only if their joint probability
distribution is the product of their marginal probability
functions:

P(x, y)  P(x)P(y)
for all possible pairs of values x and y

 A set of k random variables are independent if and only

if
P(x1, x2,, xk )  P(x1)P(x 2 )P(xk )

Copyright © 2013 Pearson Education Ch. 4-106

Example 4.16 Stock Returns, Marginal Probability, Mean,
and Variance (Joint Probabilities)

Suppose that Charlotte King has two stocks, A and B. Let X and
Y be random variables of possible percent returns (0%, 5%,
10%, and 15%) for each of these two stocks, with the joint
probability distribution given in Table 4.7.

a. Find the marginal probabilities.

b. Determine if X and Y are independent.

c. Find the means and variances of both X and Y.

Copyright © 2013 Pearson Education Ch. 4-107

Copyright © 2013 Pearson Education Ch. 4-108
Copyright © 2013 Pearson Education Ch. 4-109
Copyright © 2013 Pearson Education Ch. 4-110
 Conditional Mean and Variance

 The conditional mean is

μY|X  E[Y | X]   (y | x) P(y | x)

Y

 The conditional variance is

σ 2Y|X  E[(Y  μY|X )2 | X]   [(y  μY|X )2 | x]P(y | x)

Y

Copyright © 2013 Pearson Education Ch. 4-111

Copyright © 2013 Pearson Education Ch. 4-112
 Covariance
 Let X and Y be discrete random variables with means
μX and μY
 The expected value of (X - μX)(Y - μY) is called the
covariance between X and Y
 For discrete random variables
Cov(X, Y)  E[(X  μX )(Y  μY )]   (x  μx )(y  μy )P(x, y)
x y

 An equivalent expression is
Cov(X, Y)  E(XY)  μxμy   xyP(x, y)  μxμy
x y

Copyright © 2013 Pearson Education Ch. 4-113

 Correlation
 The correlation between X and Y is:

Cov(X, Y)
ρ  Corr(X, Y) 
σ Xσ Y
 -1 ≤ ρ ≤ 1
 ρ=0 no linear relationship between X and Y
 ρ>0 positive linear relationship between X and Y
 when X is high (low) then Y is likely to be high (low)
 ρ = +1 perfect positive linear dependency
 ρ<0 negative linear relationship between X and Y
 when X is high (low) then Y is likely to be low (high)
 ρ = -1 perfect negative linear dependency
Copyright © 2013 Pearson Education Ch. 4-114
 Correlation and Independence

 The correlation measures the strength of the

linear relationship between two variables

 If two random variables are statistically

independent, the covariance (automatically
also correlation) between them is 0
 The converse is not necessarily true

Copyright © 2013 Pearson Education Ch. 4-115

 Portfolio Analysis

 Let random variable X be the price for stock A

 Let random variable Y be the price for stock B
 The market value, W, for the portfolio is given by the
linear function

W  aX  bY
(a is the number of shares of stock A,
b is the number of shares of stock B)

Copyright © 2013 Pearson Education Ch. 4-116

 Portfolio Analysis
(continued)

 The mean value for W is

μW  E[W]  E[aX  bY]
 aμX  bμY
 The variance for W is

σ 2W  a2σ 2X  b2σ 2Y  2abCov(X, Y)

or using the correlation formula

σ 2W  a2σ 2X  b2σ 2Y  2abCorr(X, Y)σ Xσ Y

Copyright © 2013 Pearson Education Ch. 4-117

 Example: Investment Returns

Return per $1,000 for two types of investments

Investment
P(xiyi) Economic condition Passive Fund X Aggressive Fund Y
.2 Recession - $ 25 - $200
.5 Stable Economy + 50 + 60
.3 Expanding Economy + 100 + 350

E(x) = μx = (-25)(.2) +(50)(.5) + (100)(.3) = 50

E(y) = μy = (-200)(.2) +(60)(.5) + (350)(.3) = 95

Copyright © 2013 Pearson Education Ch. 4-118
 Computing the Standard Deviation
for Investment Returns
Investment
P(xiyi) Economic condition Passive Fund X Aggressive Fund Y
0.2 Recession - $ 25 - $200
0.5 Stable Economy + 50 + 60
0.3 Expanding Economy + 100 + 350

σ X  (-25  50)2 (0.2)  (50  50)2 (0.5)  (100  50)2 (0.3)

 43.30

σ y  (-200  95)2 (0.2)  (60  95)2 (0.5)  (350  95)2 (0.3)

 193.71
Copyright © 2013 Pearson Education Ch. 4-119
 Covariance for Investment Returns
Investment
P(xiyi) Economic condition Passive Fund X Aggressive Fund Y
.2 Recession - $ 25 - $200
.5 Stable Economy + 50 + 60
.3 Expanding Economy + 100 + 350

Cov(X, Y)  (-25  50)(-200  95)(.2)  (50  50)(60  95)(.5)

 (100  50)(350  95)(.3)
 8250

Copyright © 2013 Pearson Education Ch. 4-120

 Portfolio Example
Investment X: μx = 50 σx = 43.30
Investment Y: μy = 95 σy = 193.21
σxy = 8250

Suppose 40% of the portfolio (P) is in Investment X and

60% is in Investment Y:
E(P)  .4 (50)  (.6) (95)  77

σ P  (.4) 2 (43.30) 2  (.6)2 (193.21) 2  2(.4)(.6)( 8250)

 133.04

The portfolio return and portfolio variability are between the values
for investments X and Y considered individually
Copyright © 2013 Pearson Education Ch. 4-121
 Interpreting the Results for
Investment Returns

 The aggressive fund has a higher expected

return, but much more risk

μy = 95 > μx = 50
but
σy = 193.21 > σx = 43.30

 The Covariance of 8250 indicates that the two

investments are positively related and will vary
in the same direction
Copyright © 2013 Pearson Education Ch. 4-122
Portfolio variance—and, hence, risk—changes with different
correlations between stock prices. Note that the portfolio
variance is linearly related to the correlation.

By selecting stocks with particular combinations of correlations,

fund managers can control the variance and the risk for
portfolios.

Copyright © 2013 Pearson Education Ch. 4-123

 Basic Questions

1) Consider the joint probability distribution:

a. Compute the marginal probability distributions for X and Y.

b. Compute the covariance and correlation for X and Y.
c. Compute the mean and variance for the linear function W = 2X + Y

Copyright © 2013 Pearson Education Ch. 4-124

 2) A researcher suspected that the number
of between meal snacks eaten by students
in a day during final examinations might
depend on the number of tests a student
had to take on that day. Next table shows
joint probabilities, estimated from a survey.

a. Find the probability distribution of X and compute the mean number of tests taken
by students on that day.

b. Find the probability distribution of Y and, hence, the mean number of snacks
eaten by students on that day.

c. Find and interpret the conditional probability distribution of Y, given

that X = 3

d. Find the covariance between X and Y.

e. Are number of snacks and number of tests independent of each other?

Copyright © 2013 Pearson Education Ch. 4-125

3) A restaurant manager receives occasional complaints about the quality
of both the food and the service. The marginal probability distributions for
the number of weekly complaints in each category are shown in the
accompanying table. If complaints about food and service are independent
of each other, find the joint probability distribution.

Copyright © 2013 Pearson Education Ch. 4-126

4) Refer to the information in the previous exercise.

Find the mean and standard deviation of the total number of complaints
received in a week. Having reached this point, you are concerned that the
numbers of food and service complaints may not be independent of each
other. However, you have no information about the nature of their
dependence.

What can you now say about the mean and standard deviation of the total
number of complaints received in a week?

Copyright © 2013 Pearson Education Ch. 4-127