E370

Week 05
Part 3:
Making New Variables by
Adding Old Variables
Univariate Random Variables
Those we measure or count from raw data

Multivariate Random Variables

We COULD measure and/or count these, but we can
also get them by adding Univariate Random
Variables, also called combinations.

Where do random variables

come from?
 LINEAR
What does that mean? A variable can
have a constant added to or subtracted from it,
be multiplied or divided by a constant,
be added to or subtracted from another variable,
or any combination of the above.
If the formula for the new variable contains functions such
as square roots or logarithms, then the combination is not
linear.
Forexample, if Y = 3X1 + 2X2 then Y is a linear
combination of the variables X1 and X2.

What is the most common

combination method?
Ifwe add random variables then the
new variable is also random.
o That means it must have a distribution.
o That means it must have expected
values.

New Random Variables

 Original data Original data
Statistic plus c times c
Changes . . . Changes . . .
Mean +c c*
Median MED + c c*MED
Mode Mode + c c*Mode
Range No Change c*Range
Variance No Change c2*2

St. Deviation No Change |c|*

Summary
 The president of Midwest Foods is thinking of
building a meat distribution facility on the
outskirts of Chicago. Contribution per pound to
profits is known to be $0.40 for pork and $0.50
for beef. The president is interested in overall
profits. Define a relevant random variable.

TP = 0.4*P + 0.5*B

A practical problem
 Itis known that expected pork sales per
month are 2300 pounds. Expected beef sales
per month are 4200. Calculate the expected
value of profits.
E(TP) = E(0.4P + 0.5B)
= E(0.4P) + E(0.5B)
= 0.4*E(P) + 0.5*E(B)
= 0.4*2300 + 0.5*4200
= 920 + 2100 = $3,020

Expected Value
The expected value of the sum of random
variables is the sum of the expected values
of its parts.
For S= aX + bY + c
E(S) =E(aX + bY + c)
=E(aX) + E(bY) + (E(c))
=a*E(X) + b*E(Y) + c

(E(c) = c)

Big News
 Theexpected standard deviation of pork
sales is1187 pounds; the expected standard
deviation of beef sales is 1400 pounds.
Calculate the expected standard deviation of
profits, assuming pork and beef sales are
independent of one another.
o Calculate Variance
o Take Square Root of it.

Independent
Expected Standard Deviation
 V(TP) = V(0.4*P + 0.5*B)

=V(0.4*P) + V(0.5*B)

=(0.4)2 *V(P) + (0.5)2 *V(B)

=(0.16) *(1408969) + (0.25) * (1960000)

=225435.04 + 490000 = 715435.04

Thus,the standard deviation is =SQRT(715435.04) =

$845.83

Variance Calculations
The expected variance of the sum of
random variables is the sum of the
expected variances of its parts . . .
For S= aX + bY + c
V(S) = V(aX + bY + c)
=V(aX) + V(bY) + V(c)
=a2*V(X) + b2*V(Y) + 0
V(c) = 0
(. . . plus the expected covariances of its variable pairs.)

More Big News

 The covariance between pork and beef sales is
1,160,000. Calculate the expected standard
deviation of profits that includes this information.
Must include the variation from between the
variables: 2*a*b*pb = 2*(0.4)*(0.5)*(1160000)
= 64,000
715435.04 + (64,000) = 651435.04
Thus, the standard deviation is =SQRT(651435.04)
= $807.12

Dependent
Expected Standard Deviation
Expected Values of
Sums of 2 Random Variables

E(aX+bY)=aE(X) + bE(Y) = ax + by

V(aX+bY)=a2V(X) + b2V(Y) + 2abCOV(X,Y)

= a22x + b22y +2abxy

Expected Values Summary

Expected Values of
Sums of 3 Random Variables

E(aX+bY+cZ)=aE(X) + bE(Y) + cE(Z)

= ax + by + cz

V(aX+bY+cZ)=a2V(X)+b2V(Y)+c2V(Z)
+2abCOV(X,Y)+2bcCOV(Y,Z)+2caCOV(Z,X)
= a22x+b22y+c22z +2abxy+2bcyz+2cazx

Expected Values Summary