RANDOM VARIABLES AND PROBABILITY MASS FUNCTION

Applied Statistics and Computing Lab Indian School of Business

Applied Statistics and Computing Lab

Learning Goals
To understand the concept of Random Variable Types of Random Variable Concept of PMF, CDF Expectation and variance of a Random Variable Properties of Expectation of Random Variable

Applied Statistics and Computing Lab

Random Experiments and Random Variable: Concept

Random Experiments: 1. There is a lot of 50 manufacturing items out of which 10 are defective. A random sample of size 4 is drawn where the items are drawn together at one time, so that the order is not important. 2. One observes how many times the BSE Sensex goes up and down and remains the same in a week. Questions of interest: Number of defective items in the random sample of 4 items drawn Number of times Sensex has gone up in the week

Sample space of random experiment 1 : { NNNN, DNNN ,DDNN, DDDN, DDDD} where N= non-defective item drawn, D= Defective item drawn Note: Here since items are drawn at a time, the order doesnt matter. For example, {DNNN,NDNN,NNDN,NNND} all represent the same event. Sample space of random experiment 2: {UUUUU ,UUUUD, UUUDU, UUDUU, UDUUU, DUUUU,UUUDD, UUDDU, UDDUU, DDUUU, DUDUU, DUUDU, DUUUD, UDUDU, UDUUD, UUDUD,DDDUU, DDUUD, DUUDD, UUDDD, UDUDD, UDDUD, UDDDU, DUDUD, DUDDU, DDUDU,DDDDU, DDDUD, DDUDD, DUDDD, UDDDD,DDDDD} Where U= event that the stock price goes up D= event that stock price remains same or goes down (Note: Stock prices reported for 5 days in a week)
3

Applied Statistics and Computing Lab

Random Variable: Definition

Let X represent a quantitative variable that is measured or observed in an experiment For random experiment 1, X= Number of defective items in the random sample of 4 items drawn X can take values 0,1,2,3,4 For random experiment 2, X=Number of times Sensex has gone up in the week X can take values 0,1,2,3,4,5 For random experiment 1 we list out the values of X and the corresponding events Values of X Corresponding Events X=0 NNNN X=1 DNNN X=2 DDNN When an experiment is conducted, we know from X=3 DDDN beforehand the range of values that X can assume, but X=4 DDDD the actual outcome that will materialize is unknown We see, corresponding to every point in the sample space we have an unique value for X X though can correspond to a group of sample points (In this example, there is a one-one correspondence between the values of X and corresponding events)- Check that for the Sensex example, we have more than one sample points corresponding to a particular value of a random variable! Thus, we see that this X defines a function from the sample space to the real line. X is called a Random Variable. Thus, Random variable is defined as a function from the sample space to the real line. Key points to note: Function of sample space Correspondence between points in the sample space and the values of a random variable Random Variable thus partitions the sample space into mutually exclusive and exhaustive events.
4

Applied Statistics and Computing Lab

Probability Distribution of a Random Variable

Corresponding to each value of the random variable, we have a set of sample points and hence a particular probability of occurrence of that value of the random variable Thus, we have a natural probability assignment to the values taken by a random variable A statement of all possible values of a random variable together with the corresponding probabilities gives the probability distribution of the random variable Probability of outcome of each point in the sample space occurring=

Value of random variable X=0 X=1 X=2 X=3 X=4

Corresponding Events NNNN DNNN DDNN DDDN DDDD

Probability 40C *10C /50C = 91390 /230300= 0.39683 4 0 4 10C *40C /50C = 98800 /230300= 0.429006 1 3 4 10C *40C /50C = 35100 / 230300= 0.15241 2 2 4 10C *40C /50C = 4800 /230300= 0.020842 3 1 4 10C *40C /50C =210/230300= 0.000912 4 0 4

So we have the probability distribution for a discrete random variable The probability distribution of a discrete random variable X (For definition check slides 6,7) must satisfy the following two conditions- a) p( x) 0 for all x b) p( x) 1

all x

The probability distribution of a discrete random variable is called the probability mass function To check if a function f(x)= P(X=x) is a pmf, check if conditions a and b are satisfied. Henceforth X is used to represent the random variable in question and x the particular value it takes In this example, they are satisfied! (Check)
5

Applied Statistics and Computing Lab

Types of Random Variable

Discrete Random Variable: When the observations of a random variable can take on only a finite number of values or a countably infinite number of values then it is discrete random variable Concept of countably infinite number: Let the random variable X be the number of throws of a die till the first six appears. Then X can take any values 1,2,3,4..In theory, infinite number of possibilities for the values of x. The set of values of x corresponds to the set of counting natural numbers. Therefore, this type of infinity is called countable. Continuous random variable: When the observations of a random variable can take on any countless number of values in a line interval, then it is continuous random variable Examples: Discrete or continuous? Weight of a boy measured in kgs Continuous because weight can take any real value The number of bad checks drawn Discrete because number of checks can only be at Bank A on a day selected at whole number random Decay time for a radioactive particle Time can take any value, so continuous Number of wells an oil prospector Discrete because this corresponds to counting the drills until the first productive well set of natural numbers is found
6

Applied Statistics and Computing Lab

Discrete or Continuous?

Can you count the number of cubes, the number of cars in the left panel? Can you measure the weight, the time and the scale in the right panel? For all practical purposes, the values of continuous random variables can be measured (at least in theory) to any degree of accuracy while the values taken by discrete random variable can be counted
Visuals from AczelSounderpandian, Complete Business Statistics
Applied Statistics and Computing Lab
7

Cumulative Distribution Function of a Discrete Random Variable

The probability distribution of a discrete random variable lists the probabilities of occurrence of different values of the random variable. We may be interested in cumulative probabilities of the random variable. That is, we may be interested inThe probability that the value of the random variable is at most some value x. This is the sum of all the probabilities of the values i of X that are less than or equal to x We ask the question- what is the probability that at most 0,1,2,3,4 items are defective out of the sample of 4 items? Obviously, for discrete random variable, you obtain the cumulative probabilities by adding individual probabilities Value of Random Variable (X) 0 Probability
91390 /230300

Cumulative Probability 91390/230300

1
2 3 4
Applied Statistics and Computing Lab

98800 /230300
35100 / 230300 4800 /230300 210/230300

190190/230300 225290/230300
230090/230300 230300/230300
8

Definition: Cumulative Distribution Function

The cumulative distribution function, F(x), of a discrete random variable X is F(x) = P(X x)= P(i)
all i x

All cumulative distribution functions are nondecreasing and equals 1.00 at the largest possible value of the random variable- The probability that the values of the random variable are less than or equal to the largest possible value is 1 by definition!
Applied Statistics and Computing Lab
9

Expectation and variance of a Random variable

The mean of a probability distribution of a random variable is called the expected value of the random variable The reason for this name is that the mean is the (probability-weighted) average value of the random variable, and therefore it is the value we expect to occur , for discrete random variable E ( x) xp ( x)
all x

Variance of a random variable is the expected squared deviation of the random variable from its mean( Expectation). The idea is similar to that of the variance of a data set. Probabilities of the values of the random variable are used as weights in the computation of the squared deviation from the mean of a discrete random variable. The denition of the variance follows. The variance of a discrete random variable X is given by ( X E ( X )) 2 p( X ) Var(X)= E( X E( X ))2 all X Computational formula for the variance of a random variable Var(X)= E( X 2 ) E 2 ( X ) Check that the two expressions for variance are equal
10

Applied Statistics and Computing Lab

Illustration: Computation of Mean

We rewrite table 1:

Value of X 0
1 2 3 4

Probability 0.39683
0.429006 0.15241 0.020842 0.000912

E(X)= E ( x) xp ( x) =(0*0.39683+ 1*0.429006+2*0.15241+3*.020842+4*0.000912) all x = .8 Therefore, .8 is the expected number of defective items in a lot of 4.

Applied Statistics and Computing Lab

11

Illustration: Computation of variance

Value of X 0 1 2 3 4 Probability 0.39683 0.429006 0.15241 0.020842 0.000912 X2 0 1 4 9 16

Use computational formula for variance ( easier to obtain) Var(X)= E( X 2 ) E 2 ( X ) E ( X 2 ) x 2 p( x) = 4.78924

all x

Var(X)= 4.78924 (.8)2 = 4.14924 Standard deviation (X)= sqrt(4.14924)= 2.036968

Applied Statistics and Computing Lab
12

An example: Properties of RV
Consider a book seller. At the beginning of the month he buys each book for 100 Rs and sells them at 120 Rs. Also, he has to incur a fixed monthly cost of 100 Rs towards maintenance of his store, regardless of the books sold. The number of books sold is a random variable. But he has to take a decision regarding how many books to buy at the beginning of the month from his supplier. He is interested in the following questions How many books to order? What is his expected profit per month? What is the standard deviation of the expected profit? As you can guess, he will order the expected value of the books that he can sell. He has the following data on purchase pattern from his shop-

Number of books sold (X) 5 10

Probability 1/5 1/10

15
20 25

2/5
1/10 1/5

The expected number of books sold=15. He places the order for 15 books His expected revenue= E(120x- 100x-100)= E(20X-100). How to calculate this? It would be very easy if E(20x-100) could be written= 20E(X)-100 We investigate some properties of functions of random variables Applied Statistics and Computing Lab

13

Some properties of Expectation of a Random Variable

The expected value of a function of a random variable can be computed as followsLet h(X) be a function of the discrete random variable X. The expected value of h(X), a function of the discrete random variable X, is E(h(X))= h( x) p( x)
all x

The function h(X) could be X,2X, 3X, X2, log(X) or any function (In computing variance we will use this property with h(X)= X2 ) The expected value of a linear function of a random variable is E(aX + b)= aE(X) +b, where a and b are xed numbers. An useful property of variance: Variance of a linear function of a random variable is V (aX + b)= a2 V(X), where a and b are xed numbers. As you can see, you can use the last two properties to compute the booksellers expected revenue and the expected variation in the revenue Expected Revenue= 20E(X)-100= 20*15-100= 200 Expected variation in Revenue=(20)2 *V(X)= 400*45= 18,000 Expected standard deviation= sqrt(18,000)= 134.16
Applied Statistics and Computing Lab
14

Thank you

Applied Statistics and Computing Lab