Chapter 6 - Normal Distribution

Chapter 6 Normal Distribution
6-1
Chapter 6 Learning Objectives (LOs)

LO 6.1 Describe a continuous random variable.
LO 6.2 Calculate and interpret probabilities for a random
variable that follows the continuous uniform
distribution.
LO 6.3 Explain the characteristics of the normal distribution.
LO 6.4 Use the standard normal table (z table).
variable that follows the normal distribution.
variable that follows the exponential distribution.
variable that follows the lognormal distribution.
Continuous Probability
Distributions
Business Statistics:
Communicating with Numbers, 2e
By Sanjiv Jaggia and Alison Kelly
11/13/2016
BUSINESS STATISTICS | Jaggia, Kelly

6-2
6.1 Continuous Random Variables and

the Uniform Probability Distribution
6.2 The Standard Normal Distribution

LO6.3Explainthecharacteristicsofthenormaldistribution.
LO6.1Describeacontinuousrandomvariable.
The Normal Distribution
Remember that random variables may be

classified as
Discrete
The random variable assumes a countable

number of distinct values.
Continuous
The random variable is characterized by

(infinitely) uncountable values within any
interval.
LO6.1

6-3
LO6.3
Characteristics of the Normal Distribution
Symmetric about its mean
Mean = Median = Mode

Asymptoticthat is, the
tails get closer and
closer to the
P(X < ) = 0.5
horizontal axis,
but never touch it.
Business Statistics, 2nd Ed.
6-4
Characteristics of the Normal Distribution
P(X > ) = 0.5
LO6.3
Symmetric
Bell-shaped
Closely approximates the probability distribution of a
wide range of random variables, such as the
Heights and weights of newborn babies
Scores on SAT
Cumulative debt of college graduates

Serves as the cornerstone of statistical inference.
The normal distribution is completely described

by two parameters: and 2.
is the population mean which describes the

central location of the distribution.
is the population variance which describes

the dispersion of the distribution.

6-5
LO6.3

6-6
SOM@USM
6-2
Example:SupposetheagesofemployeesinIndustriesA,
B,andCarenormallydistributed.
Herearetherelevantparameters:
LetscompareindustriesusingtheNormalcurves.
is the same, is different.
LO6.3
LO6.4Usethestandardnormaltable(ztable).
Aspecialcaseofthenormaldistribution:
Mean()isequaltozero(E(Z)=0).
Standarddeviation()isequaltoone
(SD(Z)=1).
is the same, is different.

6-7
LO6.4
TheStandardNormal(Z)Distribution.

6-8
StandardNormalTable(Z Table).
Standard Normal Table (Z Table).
GivesthecumulativeprobabilitiesP(Z < z)forpositive

andnegativevaluesofz.
SincetherandomvariableZissymmetricaboutits
meanof0,
Table for positive z values.
Table for negative z values.
P(Z <0)=P(Z >0) =0.5.
ToobtaintheP(Z <z),readdownthez columnfirst,

thenacrossthetop.
LO6.4

6-9
LO6.4
Finding the Probability for a Given z Value.
Transform normally distributed random variables into

standard normal random variables and use the z
table to compute the relevant probabilities.
The z table provides cumulative probabilities
P(Z < z) for a given z.
Finding the Probability for a Given z Value.
Portion of right-hand page of z table.

If z = 1.52, then look up
LO6.4
6-10

6-11
Remember that the z table provides cumulative

probabilities P(Z < z) for a given z.
Since z is negative, we can look up this
probability from the left-hand page of the z table.
Portion of left-hand page of Z Table.
If z = -1.96, then look up
LO6.4

6-12
SOM@USM
6-3
Find P(-1.52 < Z < 1.96) =

P(Z < 1.96) P(Z < -1.52 ) =
P(Z < 1.96) = 0.9750
P(Z < 1.52 ) = 0.0643
LO6.4
0.9750 0.0643 = 0.9107
Note the 1s are for

cumulative! A 0 would
be nonsensical for a
continuous distribution.

6-13
LO6.4

6-15
LO6.4

6-16

Example: The Empirical Rule
Revisiting the Empirical Rule.
LO6.4
For a standard normal variable Z, find the z

values that satisfy P(Z < z) = 0.6808.
Round NORM.S.INVs output

to 2 decimal places in your
HW BEFORE doing other
calculations!
6-14
Example: Alternately, use Excel to find a z

value for a given probability.
For a standard normal variable Z, find the z

values that satisfy P(Z < z) = 0.6808.
Go to the standard normal table and find 0.6808
in the body of the table.
Find the corresponding
z value from the
row/column of z.
z = 0.47.
LO6.4
Example: Finding a z value for a given

probability.
Find P(-1.52 < Z < 1.96) = P(Z < 1.96) P(Z < -1.52 )
Round NORM.S.INVs
output to 4 decimal places in
your HW BEFORE
doing other
calculations!
Example: Alternately, use Excel to look up

probabilities for standard normal variables.
Example: Finding Probabilities for a

Standard Normal Random Variable Z.

6-17
LO6.4
An investment strategy has an expected return of

4% and a standard deviation of 6%. Assume that
investment returns are normally distributed.
What is the probability of earning a return greater
than 10%?
A return of 10% is one standard deviation

above the mean, or 10 = + 1 = 4 + 6.
Since about 68% of observations fall within

one standard deviation of the mean, 32%
(100% 68%) are outside the range.
6-18
SOM@USM
6-4
6.3 Solving Problems with

the Normal Distribution

Example: The Empirical Rule
An investment strategy has an expected return of

4% and a standard deviation of 6%. Assume that
investment returns are normally distributed.
What is the probability of earning a return greater
than 10%?
Using symmetry, we
conclude that 16%
(half of 32%) of the
observations are
greater than 10%.
The Normal Transformation

Any normally distributed random variable X with
mean and standard deviation can be
transformed into the standard normal random
variable Z as:
16%
16%
68%
with corresponding values

2
( )
LO6.4
LO6.5Calculateandinterpretprobabilitiesforarandomvariable
thatfollowsthenormaldistribution.
As constructed: E(Z) = 0 and SD(Z) = 1.
( + )

6-19
LO6.5

6-20


A z value specifies by how many standard

deviations the corresponding x value falls
above (z > 0) or below (z < 0) the mean.
Use the Inverse Transformation to compute

probabilities for given x values.
LO6.5
with corresponding values

6-21
LO6.5

A standard normal variable Z can be transformed

to the normally distributed random variable X
with mean and standard deviation as
A positive z indicates by how many standard

deviations the corresponding x lies above .
A zero z indicates that the corresponding x
equals
A negative z indicates by how many standard
deviations the corresponding x lies below
First transform the random variable X to Z using the

transformation formula:
Using the standard normal table, find

P(Z > -1.5) = 1 P(Z < -1.5) = 1 0.0668 = 0.9332
LO6.5
6-22

the Normal Distribution - Excel
Example: Scores on a management aptitude exam

are normally distributed with a mean of 72 () and
a standard deviation of 8 ().
What is the probability that a randomly selected
manager will score above 60?
Example: Scores on a management aptitude exam

are normally distributed with a mean of 72 () and
a standard deviation of 8 ().
What is the probability that a randomly selected
manager will score above 60?

6-23
LO6.5
Alternately, Excel will return the probability directly if

you use NORM.DIST() and give it the mean and
standard deviation.

6-24
SOM@USM
6-5
Introductory Case: Demand for Salmon
Introductory Case: Demand for Salmon

Based on this information, Akiko would like to:
Calculate the proportion of days that demand for
salmon at Little Ginza was above her earlier
purchase of 20 pounds.
Calculate the proportion of days that demand for
salmon at Little Ginza was below 15 pounds.
Determine the amount of salmon that should be
bought daily so that it meets demand on 90% of
the days.
Akiko Hamaguchi, manager of a small sushi

restaurant, Little Ginza, in Phoenix, Arizona, has to
estimate the daily amount of salmon needed.
Akiko has estimated the daily consumption of
salmon to be normally distributed with a mean of
12 pounds and a standard deviation of 3.2 pounds.
Buying 20 lbs of salmon every day has resulted in
too much wastage.
Therefore, Akiko will buy salmon that meets the
daily demand of customers on 90% of the days.

6-25
6-26

Case Solution: Akiko is concerned about buying the right
amount of salmon for Little Ginza. The daily consumption is
normally distributed with a mean of 12 pounds and a
standard deviation of 3.2 pounds.
a. What proportion of days was demand above 20 pounds?
c. How much salmon should she buy so she meets customer

demand on 90% of the days?
In order to answer this, solve for the z-score of a 90%
probability and then plug that z into the equation:
or just use NORM.INV() in Excel:
b. What proportion of days was demand below 15 pounds?
App A Table 1. Standard Normal Curve
LO6.5
Case Solution: Akiko is concerned about buying the right

amount of salmon for Little Ginza. The daily consumption is
normally distributed with a mean of 12 pounds and a
standard deviation of 3.2 pounds.

6-27
LO6.5

6-28
App A Table 1. Standard Normal Curve

SOM@USM
6-6
End of Chapter 6
SOM@USM

Chapter 6 - Normal Distribution

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Chapter 6 - Normal Distribution

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Chapter 6 Normal Distribution

Chapter 6 Learning Objectives (LOs)

BUSINESS STATISTICS | Jaggia, Kelly

6.1 Continuous Random Variables and

6.2 The Standard Normal Distribution

The Normal Distribution

Remember that random variables may be

The random variable assumes a countable

The random variable is characterized by

BUSINESS STATISTICS | Jaggia, Kelly

Characteristics of the Normal Distribution

Symmetric about its mean

Mean = Median = Mode

Business Statistics, 2nd Ed.

Characteristics of the Normal Distribution

P(X > ) = 0.5

BUSINESS STATISTICS | Jaggia, Kelly

6.2 The Standard Normal Distribution

6.2 The Standard Normal Distribution

Heights and weights of newborn babies

Cumulative debt of college graduates

The normal distribution is completely described

is the population mean which describes the

is the population variance which describes

BUSINESS STATISTICS | Jaggia, Kelly

BUSINESS STATISTICS | Jaggia, Kelly