Statistics for

Business and Economics

6th Edition

Chapter 6

Continuous Random Variables

and Probability Distributions

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-1
 Chapter Goals

After completing this chapter, you should be

able to:
 Explain the difference between a discrete and a
continuous random variable
 Describe the characteristics of the uniform and normal
distributions
 Translate normal distribution problems into standardized
normal distribution problems
 Find probabilities using a normal distribution table

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-2
 Chapter Goals
(continued)

After completing this chapter, you should be

able to:
 Evaluate the normality assumption
 Use the normal approximation to the binomial
distribution
 Recognize when to apply the exponential distribution
 Explain jointly distributed variables and linear
combinations of random variables

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-3
 Probability Distributions
Probability
Distributions

Ch. 5 Discrete Continuous Ch. 6

Probability Probability
Distributions Distributions

Binomial Uniform

Hypergeometric Normal

Poisson Exponential

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-4
 Continuous Probability Distributions
 A continuous random variable is a variable that
can assume any value in an interval
 thickness of an item
 time required to complete a task
 temperature of a solution
 height, in inches

 These can potentially take on any value,

depending only on the ability to measure
accurately.

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-5
 Cumulative Distribution Function
 The cumulative distribution function, F(x), for a
continuous random variable X expresses the
probability that X does not exceed the value of x

F(x)  P(X  x)

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-6
 Probability of a Range Using a Cumulative
Distribution Function

 Let X be a continuous random variable with a

cumulative distribution function F1x2, and let a
and b be two possible values of X, with a < b.
The probability that X lies between a and b is as
follows:

P(a  X  b)  F(b)  F(a)

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-7
 Probability Density Function
The probability density function, f(x), of random variable X has the
following properties:
1. f(x) > 0 for all values of x
2. The area under the probability density function f(x) over all values of the
random variable X is equal to 1.0
3. The probability that X lies between two values is the area under the
density function graph between the two values

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-8
 4. The cumulative density function F(x0) is the
area under the probability density function f(x)
from the minimum x value up to x0
x0

f(x 0 )   f(x)dx
xm

 where xm is the minimum value of the random

variable x
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-9
 Probability as an Area

Shaded area under the curve is the

probability that X is between a and b
f(x)
P (a ≤ x ≤ b)
= P (a < x < b)
(Note that the probability
of any individual value is
zero)

a b x

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-10
 The incomes of all families in a particular suburb can be
represented by a continuous random variable. It is known
that the median income for all families in this suburb is
$60,000 and that 40% of all families in the suburb have
incomes above $72,000.
 For a randomly chosen family, what is the probability that
its income will be between $60,000 and $72,000?

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-11
 The Uniform Distribution
Probability
Distributions

Continuous
Probability
Distributions

Uniform

Normal

Exponential

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-12
 The Uniform Distribution

 The uniform distribution is a probability

distribution that has equal probabilities for all
possible outcomes of the random variable

f(x)
Total area under the
uniform probability
density function is 1.0

xmin xmax x

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-13
 The Uniform Distribution
(continued)

The Continuous Uniform Distribution:

1
if a  x  b
ba
f(x) =
0 otherwise

where
f(x) = value of the density function at any x value
a = minimum value of x
b = maximum value of x

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-14
 Properties of the
Uniform Distribution

 The mean of a uniform distribution is

ab
μ
2
 The variance is
2
(b - a)
σ2 
12

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-15
 Uniform Distribution Example
Example: Uniform probability distribution
over the range 2 ≤ x ≤ 6:

1
f(x) = 6 - 2 = .25 for 2 ≤ x ≤ 6

f(x)
ab 26
μ  4
.25 2 2

(b - a)2 (6 - 2)2
σ 
2
  1.333
2 6 x 12 12

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-16
 The jurisdiction of a rescue team includes emergencies occurring on a
stretch of river that is 4 miles long. Experience has shown that the
distance along this stretch, measured in miles from its northernmost
point, at which an emergency occurs can be represented by a uniformly
distributed random variable over the range 0 to 4 miles. Then, if X
denotes the distance (in miles) of an emergency from the northernmost
point of this stretch of river, its probability density function is as follows

Find the probability that a given emergency arises within 1 mile of the
northernmost point of this stretch of river.

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-17
 Suppose that a random experiment leads to an outcome that can be
represented by a continuous random variable. If N independent
replications of this experiment are carried out, then the expected
value of the random variable is the average of the values taken as
the number of replications becomes infinitely large. The expected
value of a random variable is denoted by E (X)

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-18
 Expectations for Continuous
Random Variables

 The mean of X, denoted μX , is defined as the

expected value of X

μX  E(X)

 The variance of X, denoted σX2 , is defined as the

expectation of the squared deviation, (X - μX)2, of a
random variable from its mean
σ 2X  E[(X  μX )2 ]

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-19
 Linear Functions of Variables
 Let W = a + bX , where X has mean μX and
variance σX2 , and a and b are constants
 Then the mean of W is
μW  E(a  bX)  a  bμX
 the variance is
σ 2
W  Var(a  bX)  b σ 2 2
X

 the standard deviation of W is

σW  b σX
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-20
  A fashion house in London offers a designer a
contract, according to which she is to be paid a
fixed sum of £10,000 plus £1.75 for each unit of
her design sold. Her uncertainty about total sales
of the design can be represented by a random
variable with a mean of 25,000 and a standard
deviation of 8,500. Find the mean and standard
deviation of the total payments she will receive.

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-21
 Linear Functions of Variables
(continued)

 An important special case of the previous results is the

standardized random variable

X  μX
Z
σX
 which has a mean 0 and variance 1

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-22
 The Normal Distribution
Probability
Distributions

Continuous
Probability
Distributions

Uniform

Normal

Exponential

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-23
 The Normal Distribution
(continued)
‘Bell Shaped’
 Symmetrical f(x)
 Mean, Median and Mode
are Equal
Location is determined by the σ
mean, μ x
Spread is determined by the μ
standard deviation, σ
Mean
= Median
The random variable has an = Mode
infinite theoretical range:
+  to  
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-24
 The Normal Distribution
(continued)

 The normal distribution closely approximates the

probability distributions of a wide range of random
variables
 Distributions of sample means approach a normal
distribution given a “large” sample size
 Computations of probabilities are direct and elegant
 The normal probability distribution has led to good
business decisions for a number of applications

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-25
 Many Normal Distributions

By varying the parameters μ and σ, we obtain

different normal distributions

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-26
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-27
 The Normal Distribution
Shape
f(x) Changing μ shifts the
distribution left or right.

Changing σ increases
or decreases the
σ spread.

μ x

Given the mean μ and variance σ we define the normal

distribution using the notation
X ~ N(μ,σ 2 )
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-28
 The Normal Probability
Density Function

 The formula for the normal probability density

function is
1 (x μ)2 /2σ 2
f(x)  e
2π

Where e = the mathematical constant approximated by 2.71828

π = the mathematical constant approximated by 3.14159
μ = the population mean
σ = the population standard deviation
x = any value of the continuous variable,  < x < 
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-29
 Cumulative Normal Distribution

 For a normal random variable X with mean μ and

variance σ2 , i.e., X~N(μ, σ2), the cumulative
distribution function is

F(x 0 )  P(X  x 0 )

f(x)

P(X  x 0 )

0 x0 x

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-30
 Finding Normal Probabilities

The probability for a range of values is

measured by the area under the curve

P(a  X  b)  F(b)  F(a)

a μ b x

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-31
 Finding Normal Probabilities
(continued)

F(b)  P(X  b)

a μ b x

F(a)  P(X  a)

a μ b x

P(a  X  b)  F(b)  F(a)

a μ b x
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-32
 Cumulative Distribution for a Normal Random
Variable

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-33
 The Standardized Normal
 Any normal distribution (with any mean and variance
combination) can be transformed into the
standardized normal distribution (Z), with mean 0
and variance 1
f(Z)

Z ~ N(0,1) 1
0 Z
 Need to transform X units into Z units by subtracting the
mean of X and dividing by its standard deviation

X μ
Z
σ
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-34
 Example

 If X is distributed normally with mean of 100

and standard deviation of 50, the Z value for
X = 200 is

X  μ 200  100
Z   2.0
σ 50
 This says that X = 200 is two standard
deviations (2 increments of 50 units) above
the mean of 100.

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-35
 Comparing X and Z units

100 200 X (μ = 100, σ = 50)

0 2.0 Z (μ = 0, σ = 1)

Note that the distribution is the same, only the

scale has changed. We can express the problem in
original units (X) or in standardized units (Z)

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-36
 Finding Normal Probabilities
 a μ b μ
P(a  X  b)  P Z 
 σ σ 
f(x)  b μ  a μ
 F   F 
 σ   σ 

a µ b x
a μ b μ
0 Z
σ σ

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-37
 Probability as
Area Under the Curve
The total area under the curve is 1.0, and the curve is
symmetric, so half is above the mean, half is below

f(X) P(   X  μ)  0.5
P(μ  X   )  0.5

0.5 0.5

μ X
P(   X   )  1.0
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-38
 Appendix Table 1
 The Standardized Normal table in the textbook
(Appendix Table 1) shows values of the
cumulative normal distribution function

 For a given Z-value a , the table shows F(a)

(the area under the curve from negative infinity to a )

F(a)  P(Z  a)

0 a Z
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-39
 The Standardized Normal Table

 Appendix Table 1 gives the probability F(a) for

any value a

.9772
Example:
P(Z < 2.00) = .9772

0 2.00 Z

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-40
 The Standardized Normal Table
(continued)

 For negative Z-values, use the fact that the

distribution is symmetric to find the needed
probability:
.9772

.0228
Example:
0 2.00 Z
P(Z < -2.00) = 1 – 0.9772
= 0.0228 .9772
.0228

-2.00 0 Z
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-41
 General Procedure for
Finding Probabilities

To find P(a < X < b) when X is

distributed normally:
 Draw the normal curve for the problem in
terms of X

 Translate X-values to Z-values

 Use the Cumulative Normal Table

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-42
 Finding Normal Probabilities

 Suppose X is normal with mean 8.0 and

standard deviation 5.0
 Find P(X < 8.6)

X
8.0
8.6
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-43
 Finding Normal Probabilities
(continued)
 Suppose X is normal with mean 8.0 and
standard deviation 5.0. Find P(X < 8.6)
X  μ 8.6  8.0
Z   0.12
σ 5.0

μ=8 μ=0
σ = 10 σ=1

8 8.6 X 0 0.12 Z

P(X < 8.6) P(Z < 0.12)

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-44
 Solution: Finding P(Z < 0.12)

Standardized Normal Probability P(X < 8.6)

Table (Portion) = P(Z < 0.12)
z F(z) F(0.12) = 0.5478
.10 .5398

.11 .5438

.12 .5478
Z
0.00
.13 .5517
0.12

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-45
 Upper Tail Probabilities

 Suppose X is normal with mean 8.0 and

standard deviation 5.0.
 Now Find P(X > 8.6)

X
8.0
8.6
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-46
 Upper Tail Probabilities
(continued)

 Now Find P(X > 8.6)…

P(X > 8.6) = P(Z > 0.12) = 1.0 - P(Z ≤ 0.12)
= 1.0 - 0.5478 = 0.4522

0.5478
1.000 1.0 - 0.5478
= 0.4522

Z Z
0 0
0.12 0.12
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-47
  Anticipated consumer demand at a restaurant for free-
range steaks next month can be modeled by a normal
random variable with mean 1,500 pounds and standard
deviation 110 pounds.
 a. What is the probability that demand will exceed 1,300
pounds?
 b. What is the probability that demand will be between
1,400 and 1,600 pounds?

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-48
 Finding the X value for a
Known Probability

 Steps to find the X value for a known

probability:
1. Find the Z value for the known probability
2. Convert to X units using the formula:

X  μ  Zσ

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-49
 Finding the X value for a
Known Probability
(continued)

Example:
 Suppose X is normal with mean 8.0 and
standard deviation 5.0.
 Now find the X value so that only 20% of all
values are below this X

.2000

? 8.0 X
? 0 Z
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-50
 Find the Z value for
20% in the Lower Tail
1. Find the Z value for the known probability
Standardized Normal Probability  20% area in the lower
Table (Portion) tail is consistent with a
z F(z) Z value of -0.84
.82 .7939 .80
.20
.83 .7967

.84 .7995
? 8.0 X
.85 .8023 -0.84 0 Z

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-51
  A new television series is to be shown. A
broadcasting executive feels that his
uncertainty about the rating that the show will
receive in its first month can be represented by
a normal distribution with a mean of 18.2 and a
standard deviation of 1.5. According to this
executive, the probability is 0.1 that the rating
will be less than what number?

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-52
 Finding the X value

2. Convert to X units using the formula:

X  μ  Zσ

 8.0  ( 0.84)5.0

 3.80

So 20% of the values from a distribution

with mean 8.0 and standard deviation
5.0 are less than 3.80

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-54
 Assessing Normality

 Not all continuous random variables are

normally distributed

 It is important to evaluate how well the data is

approximated by a normal distribution

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-55
 The Normal Probability Plot

 Normal probability plot

 Arrange data from low to high values
 Find cumulative normal probabilities for all values
 Examine a plot of the observed values vs. cumulative
probabilities (with the cumulative normal probability
on the vertical axis and the observed data values on
the horizontal axis)
 Evaluate the plot for evidence of linearity

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-56
 The Normal Probability Plot
(continued)

A normal probability plot for data

from a normal distribution will be
approximately linear:

100

Percent

0
Data

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-57
 The Normal Probability Plot
(continued)

Left-Skewed Right-Skewed
100 100
Percent

Percent
0 0
Data Data

Uniform
100 Nonlinear plots indicate
a deviation from
Percent

normality
0
Data
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-58
 Normal Distribution Approximation
for Binomial Distribution

 Recall the binomial distribution:

 n independent trials
 probability of success on any given trial = P

 Random variable X:
 Xi =1 if the ith trial is “success”
 Xi =0 if the ith trial is “failure”

E(X)  μ  nP
Var(X)  σ  nP(1- P) 2

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-59
 Normal Distribution Approximation
for Binomial Distribution
(continued)

 The shape of the binomial distribution is

approximately normal if n is large

 The normal is a good approximation to the binomial

when nP(1 – P) > 9

 Standardize to Z from a binomial distribution:

X  E(X) X  np
Z 
Var(X) nP(1 P)

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-60
 Normal Distribution Approximation
for Binomial Distribution
(continued)

 Let X be the number of successes from n independent

trials, each with probability of success P.

 If nP(1 - P) > 9,

 a  nP b  nP 
P(a  X  b)  P Z 
nP(1  P) nP(1  P) 
 

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-61
 Binomial Approximation Example
 40% of all voters support ballot proposition A. What
is the probability that between 76 and 80 voters
indicate support in a sample of n = 200 ?
 E(X) = µ = nP = 200(0.40) = 80
 Var(X) = σ2 = nP(1 – P) = 200(0.40)(1 – 0.40) = 48
( note: nP(1 – P) = 48 > 9 )

 76  80 80  80 
P(76  X  80)  P Z 
 200(0.4)(1 0.4) 200(0.4)(1 0.4) 

 P( 0.58  Z  0)
 F(0)  F( 0.58)
 0.5000  0.2810  0.2190

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-62
  Mary David makes the initial telephone contact
with customers who have responded to an
advertisement on her company’s Web page in an
effort to assess whether a follow-up visit to their
homes is likely to be worthwhile. Her experience
suggests that 40% of the initial contacts lead to
follow-up visits. If she has 100 Web page contacts,
what is the probability that between 45 and 50 home
visits will result?

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-63
 The Exponential Distribution
Probability
Distributions

Continuous
Probability
Distributions

Normal

Uniform

Exponential

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-64
 The Exponential Distribution

 Used to model the length of time between two

occurrences of an event (the time between
arrivals)

 Examples:
 Time between trucks arriving at an unloading dock
 Time between transactions at an ATM Machine
 Time between phone calls to the main operator

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-65
 The Exponential Distribution
(continued)

 The exponential random variable T (t>0) has a

probability density function

λt
f(t)  λ e for t  0

 Where
  is the mean number of occurrences per unit time
 t is the number of time units until the next occurrence
 e = 2.71828
 T is said to follow an exponential probability distribution

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-66
 The Exponential Distribution
 Defined by a single parameter, its mean  (lambda)

 The cumulative distribution function (the probability that

an arrival time is less than some specified time t) is

λt
F(t)  1 e

where e = mathematical constant approximated by 2.71828

 = the population mean number of arrivals per unit
t = any value of the continuous variable where t > 0

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-67
 Exponential Distribution
Example
Example: Customers arrive at the service counter at
the rate of 15 per hour. What is the probability that the
arrival time between consecutive customers is less
than three minutes?

 The mean number of arrivals per hour is 15, so  = 15

 Three minutes is .05 hours
 P(arrival time < .05) = 1 – e- X = 1 – e-(15)(.05) = 0.5276
 So there is a 52.76% probability that the arrival time
between successive customers is less than three
minutes
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-68
 Joint Cumulative Distribution
Functions

 Let X1, X2, . . .Xk be continuous random variables

 Their joint cumulative distribution function,

F(x1, x2, . . .xk)
defines the probability that simultaneously X1 is less
than x1, X2 is less than x2, and so on; that is

F(x1, x 2 , , x k )  P(X1  x1  X 2  x 2  Xk  x k )

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-69
 Joint Cumulative Distribution
Functions
(continued)

 The cumulative distribution functions

F(x1), F(x2), . . .,F(xk)
of the individual random variables are called their
marginal distribution functions

 The random variables are independent if and only if

F(x1, x 2 , , x k )  F(x1 )F(x 2 )F(x k )

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-70
 Covariance
 Let X and Y be continuous random variables, with
means μx and μy

 The expected value of (X - μx)(Y - μy) is called the

covariance between X and Y
Cov(X, Y)  E[(X  μx )(Y  μy )]
 An alternative but equivalent expression is
Cov(X, Y)  E(XY)  μxμy
 If the random variables X and Y are independent, then the
covariance between them is 0. However, the converse is not true.
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-71
 Correlation

 Let X and Y be jointly distributed random variables.

 The correlation between X and Y is

Cov(X, Y)
ρ  Corr(X, Y) 
σ Xσ Y

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-72
 Sums of Random Variables
Let X1, X2, . . .Xk be k random variables with
means μ1, μ2,. . . μk and variances
σ12, σ22,. . ., σk2. Then:

 The mean of their sum is the sum of their

means
E(X1  X 2    Xk )  μ1  μ2    μk

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-73
 Sums of Random Variables
(continued)
Let X1, X2, . . .Xk be k random variables with means μ1,
μ2,. . . μk and variances σ12, σ22,. . ., σk2. Then:
 If the covariance between every pair of these random
variables is 0, then the variance of their sum is the
sum of their variances
Var(X 1  X 2    Xk )  σ12  σ 22    σ k2

 However, if the covariances between pairs of random

variables are not 0, the variance of their sum is
K 1 K
Var(X 1  X 2    Xk )  σ12  σ 22    σ k2  2  Cov(X i , X j )
i1 ji1

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-74
 Differences Between Two
Random Variables
For two random variables, X and Y

 The mean of their difference is the difference of their

means; that is
E(X  Y)  μX  μY
 If the covariance between X and Y is 0, then the
variance of their difference is
Var(X  Y)  σ 2X  σ 2Y
 If the covariance between X and Y is not 0, then the
variance of their difference is
Var(X  Y)  σ 2X  σ 2Y  2Cov(X, Y)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-75
 Linear Combinations of
Random Variables

 A linear combination of two random variables, X and Y,

(where a and b are constants) is

W  aX  bY

 The mean of W is

μW  E[W]  E[aX  bY]  aμX  bμY

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-76
 Linear Combinations of
Random Variables
(continued)

 The variance of W is

σ 2W  a 2σ 2X  b 2σ 2Y  2abCov(X, Y)

 Or using the correlation,

σ 2W  a 2σ 2X  b 2σ 2Y  2abCorr(X, Y)σ Xσ Y

 If both X and Y are joint normally distributed random

variables then the linear combination, W, is also
normally distributed

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-77
 Example

 Two tasks must be performed by the same worker.

 X = minutes to complete task 1; μx = 20, σx = 5
 Y = minutes to complete task 2; μy = 20, σy = 5
 X and Y are normally distributed and independent

 What is the mean and standard deviation of the time to

complete both tasks?

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-78
 Example
(continued)
 X = minutes to complete task 1; μx = 20, σx = 5
 Y = minutes to complete task 2; μy = 30, σy = 8

 What are the mean and standard deviation for the time to complete
both tasks?
W  XY
μW  μX  μY  20  30  50
 Since X and Y are independent, Cov(X,Y) = 0, so
σ 2W  σ 2X  σ 2Y  2Cov(X, Y)  (5)2  (8)2  89
 The standard deviation is
σ W  89  9.434
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-79
 Chapter Summary
 Defined continuous random variables
 Presented key continuous probability distributions and
their properties
 uniform, normal, exponential
 Found probabilities using formulas and tables
 Interpreted normal probability plots
 Examined when to apply different distributions
 Applied the normal approximation to the binomial
distribution
 Reviewed properties of jointly distributed continuous
random variables
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 6-80