Random Variable and Probability Distribution

Arun Kumar, Ravindra Gokhale, and Nagarajan Krishnamurthy

Quantitative Techniques-I, Term I, 2012 Indian Institute of Management Indore

Random Variable

A random variable is a rule that assigns one numerical value to each outcome of an experiment.

Common Notations: X , Y , Z , . . .

Random Variable vs. Variable

A variable can take numerical or non-numerical values.

A random variable can only take numerical values.

Example

Variable: outcome of a game={Win, loss}.

Random variable: outcome of a game={1,0}

Discrete Random Variable

A discrete random variable can assume countably innite values.

Continuous Random Variable

A continuous random variable can assume uncountably innite values.

Exercise 1

Discrete or Continuous? 1 Population in a particular state of India. 2 Total weight of consignments handled by a courier company in a day. 3 Time to complete an exam. 4 Number of participants in an exit poll.

Exercise 2

Discrete or Continuous? 1 Total number of goals scored in a hockey game. 2 Life of a particular medicine. 3 Height of the Oceans tide at a given location. 4 Amount of rain on a particular day. 5 Number of train derailments in a year.

Probability Distribution

Def: Probability distribution of a random variable X is a formula, table, or graph that gives all possible values of X and corresponding probabilities ( P(X = x) for all xs in the domain of X ).

Properties of Discrete Probability Distribution

If X is a discrete random variable with probability distribution m(x) = P(X = x) = P(x) where X {x1 , x2 , . . . , xn } then 0 P(x) 1, and n i=1 P(xi ) = 1.

Exercise 3

Explain why each of the following is or is not a valid probability distribution? x 0 1 2 3 1 P(x) 0.2 0.3 0.3 0.2
2

x -2 P(x) 0.25

-1 0 0.50 0.20

Mean and Standard Deviation of a Random Variable

Notation for mean: (How is related to x ?)

Notation for standard deviation: (How is related to s?)

Expected Value (or Mean) of a Random Variable

Def: If we make innite number of draws from the distribution of a random variable and calculate the average of the data then the average is the expected value (or mean) of the random variable. (Expected value is the balance point for a distribution)

Notation: E(X ) Expected value should not be confused with the most likely value.

Expected Value (or Mean) of a Random Variable

= E(X ) =

n i=1 xi

P(xi ).

Standard Deviation of a Random Variable

Def: Standard deviation of a random variable is obtained by making innite number of draws from the distribution of the random variable and calculating the standard deviation of the data.

Notation:

Standard Deviation of a Random Variable

2 = E[(X )2 ] =

n i=1 (xi

)2 P(xi ).

Exercise 4

A random variable X can assume ve values: 0,1,2,3,4. A portion of the probability distribution of X is shown below: x 0 P(x) 0.1 1 2 0.3 0.3 3 4 ? 0.1

Exercise 4
a) Find P(3).

Exercise 4
a) Find P(3). Ans. 1-0.8=0.2

b) What is the probability that X is greater than 2?

Exercise 4
a) Find P(3). Ans. 1-0.8=0.2

b) What is the probability that X is greater than 2? Ans. P(X > 2) = P(X = 3) + P(X = 4) = 0.3.

c) What is the probability that X is 3 or less?

Exercise 4
a) Find P(3). Ans. 1-0.8=0.2

b) What is the probability that X is greater than 2? Ans. P(X > 2) = P(X = 3) + P(X = 4) = 0.3.

c) What is the probability that X is 3 or less? Ans. P(X 3) = P(X = 0) + P(X = 1) + P(X = 2) + P(X = 3) = 0.9.

Exercise 4

c) Calculate the mean, variance, and standard deviation of the random variable X .

Exercise 5
You can insure a $50, 000 diamond for its total value by a premium of D dollars. If the probability of theft in a given year is estimated to be 0.01, what premium should the insurance company charge if it wants the expected gain equal to $1000?