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CH01. Random Variables 2023

Econometrics

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worku yaregal
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5 views

CH01. Random Variables 2023

Econometrics

Uploaded by

worku yaregal
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 43

Random variables: expected value,

variance and covariance


Definition of some basic terms in
probability
• In statistics, any process of observation or measurement
is called an experiment.

• All statistical experiments have three things in common:

– The experiment has more than one possible


outcome.
– Each possible outcome can be specified in
advance.
– The outcome of the experiment depends on chance.
• A coin toss has all the attributes of a statistical
experiment.

• There is more than one possible outcome.

• We can specify each possible outcome (i.e., heads or


tails) in advance.

• And there is an element of chance (since the outcome is


uncertain).
• The result that we obtain from an experiment is called an
outcome.

• For instance, rolling a die is an experiment.

• It is a well-defined action that leads to a well-defined


result or outcome (Note: In rolling a die the outcomes are
the number of points that face up).

• That well-defined outcome is either of the numbers 1, 2,


3, 4, 5 or 6.
• The set of all possible outcomes for an experiment is
called the sample space (denoted by S).

• In an experiment of rolling a die once, the sample space


is S = {1, 2, 3, 4, 5, 6}.

• The sample space for an experiment of tossing a coin


once is S = {Head, Tail}.
Random variables
• In many experiments, the outcomes may be non-
numerical.

• In assessing the quality of products, we may record the


outcomes as ‘defective’ and ‘non-defective’.

• In classifying medical test results for a certain infectious


disease, we may use the categories ‘positive’ and
‘negative.

• In analyzing the returns of investments, we may record


the outcomes as ‘low’ and ‘high’.
• However, our task gets much easier by quantifying the
outcomes of a random process so that we can perform
any mathematical computation of interest.

• For this purpose, we introduce the concept of a random


variable.

• A random variable is a function or rule that assigns


numerical values to each simple event of a sample
space.

• In other words, it is a function that performs a mapping


of the outcomes of a random process into a numeric
value.
Definition

• Given a random experiment with sample space S, a


random variable X is a set function that assigns
numerical values to each element s of the sample
space.
• Example: Consider an experiment of tossing a fair coin
twice.

• The sample space for this experiment is

S = {HH, HT, TH, TT}.

• These outcomes are non-numerical.

• Define the variable X as:

X = the total number of heads obtained


• In tossing a coin twice, we may get two heads, one head
or no head depending on chance.

• Hence, X = the number of heads is a result of chance


and, thus, a random variable.

– X(HH) = 2
– X(HT) = 1
– X(TH) = 1
– X(TT) = 0
• A random variable can also be defined as a variable that
takes on different values with specified probabilities.

• In the above example:

– P(X = 2) = P(2 heads) = P(HH) = 1/4

– P(X = 1) = P(1 head) = P(HT) + P(TH)


= (1/4) + (1/4) = 1/2

– P(X = 0) = P(no head) = P(TT) = 1/4


Types of random variables

• If a random variable takes on a countable number of


values (often integers) such as 0, 1, 2, 3, …, then it is
called a discrete random variable.

• Example:

– The number of customers that arrive at a bank per


hour
– The monthly number of TV sets a store sells
• If a random variable takes on any numerical value
within a certain interval, then it is called a continuous
random variable.

• It is a random variable with a set of possible values that


is infinite and uncountable.

• For example, if we let X denote the daily revenue of a


randomly selected firm (in Birr), then X is a continuous
random variable since it can take on any real number.
Probability distributions
• The probability distribution of a random variable X is a
table, graph or mathematical formula that gives the
probability of:

– observing each value of X (if X is a discrete random


variable)

– X assuming any value in an interval (if X is a


continuous random variable)
• Example: Consider an experiment of tossing a fair coin
twice.

• Define the random variable X as: X = the number of


heads obtained.

• In two tosses of a coin, the possible outcomes are HH,


TH, HT and TT.

• Thus, the total number of heads we can get is 2, 1 or 0.

• The probability that the random variable X can take on


some specific value x is written as:

P(X = x), x = 0, 1, 2
• The probability that two tosses of a coin result in two
heads (x = 2) is:
P(X = 2) = P(HH) = 1/4

• The probability of obtaining one head (x = 1) is:


P(X = 1) = P(TH) + P(HT)
= (1/4) + (1/4) = 1/2

• The probability of obtaining no head (x = 0) is:


P(X = 0) = P(TT) = 1/4
Discrete and continuous probability distributions

• Probability distributions are either continuous or discrete


depending on whether they define probabilities for
continuous or discrete random variables.

• A continuous probability distribution describes the


probabilities of the possible range of values of a
continuous random variable.

• A discrete probability distribution describes the


probability of occurrence of each value of a discrete
random variable in its domain (R).
• Condition (i) says that the probability of any value
assumed by the random variable X should lie between 0
and 1 (inclusive).

• Condition (ii) tells us that the sum of the probabilities


of all the values X can take on is equal to one.

• One consequence of properties (i) and (ii) is that:

𝟎 ≤𝑷 𝒙 ≤𝟏
The normal distribution

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