Discrete Probability Distributions

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Random Variable

Random experiment is an experiment with

random outcome.
Random variable is a variable related to a
random event

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Discrete - Continuous

Random variable is discrete if it can take no

more than countable number of values
Random variable is continuous, if it can take
any value in an interval

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Discrete Random Variables

The number of throws of a coin needed before a

head first appears
The number of dots when rolling a dice
The number of defective items in a sample of 20
items
The number of customers arriving at a check-out
counter in an hour
The number of people in favor of nuclear power in
a survey
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Continuous Random Variables

The yearly income for a family

The amount of oil imported into Finland in a
particular month
The time that elapses between the installation of a
new component and its failure
The percentage of impurity in a batch of chemicals

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Discrete probability distribution

Discrete random variable values and their

probabilities.

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 Fortune wheel

If the probability to win when number of wins probability

rolling a fortune wheel is 0 44,3705%
15% then the probability 1 39,1505
distribution for the number 2 13,8178%
of wins in 5 rolls is: 3 2,4384%
4 0,2152%
5 0,0076%

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Two Dice

7/36
6/36
Probability

5/36
4/36
3/36
2/36
1/36
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Sum of outcomes

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Cumulative Distribution

Cumulative distribution function F(x) equals the

probability to get at most x.
x F(x)
2 1/36
When playing two dice the sum of
3 3/36 outcomes lies between 2-12. Using
4 6/36 cumulative distribution we can easily find
5 10/36 probabilities for different events:
6 15/36
7 21/36 P(X<7) = 15/36 0,42
8 26/36 P(X>9) = 1 30/36 = 6/36 0,17
9 30/36
10 33/36 P(4<X<9) = 26/36 6/36 = 20/36 0,56
11 35/36
12 36/36 9
Expected Value

Expected value is just like the mean in empirical

distributions

Examples:
When playing a dice the expected value equals 3,5
Insurance company is interested in the expected value of
indemnities
Investor is interested in the expected value of portfolios
revenue

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Expected value calculation

The expected value for a discrete random variable

is obtained by multiplying each possible outcome
by its probability and then sum these products

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Expected value example 1

Annual costs of an investment are estimated to be

100 000 per year for next 10 years.
Under boom estimated revenue is 180 000 per
year and under recession 110 000 per year.
Probability of boom is 0,40 and probability of
recession is 0,60.

Estimate the profitability of the investment.

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Expected Value example 2

Assume a lottery with 1000 lottery and 31 winning

tickets. One ticket wins 500, ten tickets win 300 and
20 tickets win 100.
Define the ticket price so that the expected value of
the win is 55% of the ticket price.

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Expected value example 3

According to manufacturers statistics the car model

needs repairs under warranty as follows:
No repairs for 50% of cars
On the average 100 euros repairs for 20% of cars
On the average 200 euros repairs for 25% of cars
On the average 500 euros repairs for the rest of the
cars
How much should the warranty increase the price of
the car?

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Expected Value example 4

An arranger of a sports event wants to take a rain

insurance. The insurance price is defined using the
probabilities of rain and the amounts of possible
indemnities.
Define the price so that it is 40% higher than the expected
value of indemnity.
Rain (mm) Probability Indemnity
0-2 50% -
3-5 30% 500
6-10 18% 2000
11- 2% 6000
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Binomial Distribution Bin(n,p)

Binomial experiments satisfy the following:

The experiment consists of a sequence of n
identical trials
All possible outcomes can be classified into two
categories, usually called success and failure
The probability of an success, p, is constant from
trial to trial
The outcome of any trial is independent of the
outcome of any other trial
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Binomial Distribution Random Variables

The number of heads when tossing a coin for 50

times
The number of reds when spinning the roulette
wheel for 15 times
The number of defective items in a sample of 20
items from a large shipment
The number of people in favour of nuclear power in
a survey

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Binomial distribution and Excel

You can use Excel to find probabilities related to

binomial distribution random variables (the number of
successes x in the n trials:

Probability
=BINOMDIST(x;n;p;0)
Cumulative probability =BINOMDIST(x;n;p;1)

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Poisson distribution

Poisson experiments satisfy the following

The probability of occurrence of an event is the
same for any two intervals of equal length
The occurrence or non-occurrence of the event in
any interval is independent of the occurrence or
non-occurrence in any other interval
The probability that two or more events will occur in
an interval approaches zero as the interval
becomes smaller
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Poisson Distribution Random Variables

The number of failures in a large computer system

during a given day
The number of ships arriving at a loading facility
during a six-hour loading period
The number of delivery trucks to arrive at a central
warehouse in an hour
The number of dents, scratches, or other defects in
a large roll of sheet metal
The number of accidents at a crossroads during
one year
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Poisson and Excel

You can use Excel to find probabilities related to

Poisson distribution random variables (the number of
occurrences x in an interval):
Probability =POISSON(x;;0)
Cumulative probability =POISSON(x; ;1)
= the average number of occurrences in an interval

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Continuous Probability Distributions

22
Normal Distribution

Many continuous variables are approximately

normally distributed
Measurement errors
Physical and mental properties of people
Properties of manufactured products
Daily revenues of investments

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Normal Distribution

Normal distribution is defined by density function

area under density

function equals 1, area
represents probability

expected
value
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Cumulative Probability Function

Cumulative function for x = area to the left of x =

probability to get at most x:

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Standardized Distribution N(0,1)

Cumulative function values have been tabulated (in most

statistics textbooks) for normal distribution with expected
value 0 and standard deviation 1
This distribution is called standardized distribution and is
denoted N(0,1).

0
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Standardized Distribution and Excel

Cumulative probability =NORMSDIST(z)

Random variable value z =NORMSINV(probability)

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Standardizing

You can standardize any normal distribution N(,)

variable to a standardized distribution N(0,1) variable

SAME AREA! SAME PROB.!

x z 0

x
z

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Normal Distribution N(,) and Excel

Excel: =NORMDIST(x;;;1)
Excel: =NORMINV(cumulative probability;;)

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