Course Title : Business Statistics I

Tutorial # 5
Discrete Distributions
Exercise #1

You are trying to develop a strategy for investing in two different stocks. The anticipated annual
return for a $1,000 investment in each stock under four different economic conditions has the
following probability distribution:

Compute the
1. expected return for stock X and for stock Y.
E(X) = X=(-100)(0.1)+0(0.3)+(80)(0.3)+(150)(0.3)= 59
E(Y) = Y =(50)(0.1)+(150)(0.3)+(-20)(0.3)+(-100)(0.3)= 14
Interpretation: Fund X is averaging a $59.00 return and fund Y is averaging a $14.00 return per
$1000 invested.
2. Standard deviation for stock X and for stock Y.
2 2 2 2
❑ X =√(−100−59 ) ( 0.1 )+ ( 0−59 ) ( 0.3 ) + ( 80−59 ) ( 0.3 )+ (150−59 ) ( 0.3 )=78.67019766
2 2 2 2
❑Y =√ (50−14 ) ( 0.1 ) + ( 150−14 ) ( 0.3 ) + (−20−14 ) ( 0.3 )+ (−100−14 ) ( 0.3 )=99.6192752
Interpretation: Fund Y is subject to much more variability and the probability of loss is higher
than that of Fund X
3. Covariance of stock X and stock Y.
❑ XY = (−100−59 ) ( 50−14 )( 0.1 )+ ( 0−59 ) ( 150−14 ) ( 0.3 ) + ( 80−59 )(−20−14 ) ( 0.3 ) + ( 150−59 )(−100−14 )( 0.3 ) =−6306
Interpretation: Since the covariance is large and negative, there is a strong negative relationship
between the two investment funds, meaning that when one rises, the other falls
4. Would you invest in stock X or stock Y? Explain.
I would invest in fund X, as it is more profitable (Higher average return =59.00$ per 1000$
invested) and less risky (❑ X <❑Y )
5. You want to create a portfolio that consists of stock X and stock Y. Compute the portfolio
expected return and portfolio risk for each of the following percentages invested in stock X:
Investment X: E(X)=μX = 59 ; ❑ X =¿78.67
Investment Y: E(Y)=μY=14 ;❑Y =99.619
❑ XY =−6306

a. 30% :w=0.3
Portfolio expected return:
E(P) =w E(X) +(1- w)E(Y)
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 =0.3*59+0.7*14
=17.7+9.8
E(P)=27.5
Portfolio risk:
2
σ P= √ w2 σ 2X + ( 1−w ) σ 2Y +2 w ( 1−w ) σ XY =93.3066913
b. 50% :w=0.5
Portfolio expected return:
E(P) =w E(X) +(1- w)E(Y)
=0.5*59+0.5*14
=29.5+7
E(P)=36.5
Portfolio risk:
2
σ P= √ w2 σ 2X + ( 1−w ) σ 2Y +2 w ( 1−w ) σ XY =52.43738142

c. Which portfolio would you recommend? Explain.

The second portfolio (50% stock X and 50% stock Y) has higher expected return (36.5$ per
1000% invested) and lower risk (52.43). Therefore, it is the one to be recommended.

Exercise #2

The following table provides a breakdown of advertising sales representatives of a population

according to the number of items sold per day
Number of items sold 0 1 2 3 4

Number of representatives 488 1872 884 186 18

Cumulative number of observation 488 2360 3244 3430 3448

Total number of observations: 3448

1. Determine the Probability distribution function.
488
P ( X=0 )= =0.141531323
3448

1872
P ( X=1 ) = =0.542923434
3448
884
P ( X=2 )= =0.25638051
3448
186
P ( X=3 )= =0.053944316
3448
18
P ( X=4 )= =0.005220418
3448

2. Determine the Cumulative distribution function (CDF).

P ( X <0 )=P ( X >4 )=0
P ( X ≤0 )=P ( X=0 )=0.141531323
2360
P ( X ≤1 ) = =0.684454756
3448

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 3244
P ( X ≤2 ) = =0.940835267
3448
3430
P ( X ≤3 )= =0.994779582
3448
P ( X ≤ 4 ) =P ( X ≤ 3 ) + P ( X=4 )=1

3. What is the probability that an advertising sales representative sold more than 2 items?
P ( X >2 )=1−P ( X ≤ 2 )=0.059164733
In fact, X>2 and X<=2 are mutually exclusive and collectively exhaustive events
4. What is the probability that an advertising sales representative sold less than 3 items?
P ( X <3 ) =P ( X ≤ 3 )−P ( X =3 )=0.940835267
5. Calculate and interpret the expected value.
E ( X ) =μ=∑ x i × P ( X=x i ) =¿ 1.238399072¿
The average number of items sold by the advertising representatives is 1.238399072 items
per day. Which means that they sell around 1 item per day per representative.
6. Calculate the variance and the standard deviation.
2 2 2 2 2
σ 2=∑ ( x i−E ( X ) ) . P ( X=x i ) =( 0−1.238 ) . P ( X =0 ) + ( 1−1.238 ) . P ( X=1 ) + ( 2−1.238 ) . P ( X=2 ) + ( 3−1.238 )

σ =√ σ 2= √0.603838736=0.777070612

The majority of representatives (68%) sold between (E(X) -  0 items) and (E(X) +  2 items)

Exercise #3

The following table provides laptop sales for 30 days

Laptops sold days
0 5
1 10
2 6
3 4
4 5

1. Determine the Probability mass function (pmf).

5 1
P ( X=0 )= = =0.166666667
30 6
10 1
P ( X=1 ) = = =0.33333333333
30 3
6 1
P ( X=2 )= = =0.2
30 5
4 2
P ( X=3 )= = =0.1333333334
30 15

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 5 1
P ( X=4 )= = =0.166666667
30 6
2. Determine the Cumulative distribution function (CDF).
1
P ( X ≤0 )=P(X =0)= =0.166666667
6
15 1
P ( X ≤1 ) = = =0.5
30 2
21
P ( X ≤2 ) = =0.7
30
25
P ( X ≤3 )= =0.8333333333
30
30
P ( X ≤ 4 ) = =1
30

3. What is the probability that in five days, no laptop is sold?

P ( X=0 )=1

4. What is the probability of selling at least 3 laptops?

4 5 9
P ( X ≥3 )=P ( X=3 )+ P ( X =4 )= + = =0.3
30 30 30
5. Calculate and interpret the expected value.
0 × 5+1× 10+2× 6+3 × 4+ 4 ×5 54
E( X)=∑ x i . P ( X=x i ) = = =1.8
30 30
6. Calculate the variance and the standard deviation.
2
σ 2=∑ ( x i−E ( X ) ) . P ( X=x i ) =1.76

σ =√ σ 2= √1.76=1.326649916

Exercise #4

In a school, 60% of students have access to the internet at home. A group of 8 students is chosen at
random.
1. Define the probability distribution function
2. Find the probability that exactly 5 have access to the internet.
2. Find the probability that at least 6 students have access to the internet.
3. Compute the mean and the variance

Exercise #5

Consider that the buying behavior for the next three customers in a clothing store is independent.
The store manager estimates the customer buy-up probability to 0.3.
1. Determine the probability distribution function
2. What is the probability that no customer makes a purchase?
3. What is the probability that two customers make a purchase?

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 4. Calculate the mean and variance

Exercise #6

Candidates for a TV game show have to answer ten questions in order to be selected. They must
choose for each question, the right statement out of four. X is
the random variable denoting the number of correct answers given by the candidate at the end of the
questionnaire.
1. What is the probability distribution function of X?
2. Compute the mean and the variance
3. Calculate the probability that the candidate provides at least 8 correct answers, and thus be
selected.

Exercise #7

An airlines reservations office receives an average of 0.7 requests per minute. What is the
probability that between 1:59 pm and 2 pm, it receives:
a. no requests
b. one request
c. more than one request.

Exercise #8

A pen company averages 1.2 defective pens per carton produced (200 pens). The number of defects
per carton is Poisson distributed.
a. What is the probability of selecting a carton and finding no defective pens?
b. What is the probability of finding eight or more defective pens in a carton?
c. Suppose a purchaser of these pens will quit buying from the company if a carton contains more
than three defective pens. What is the probability that a carton contains more than three defective
pens?

Exercise #9

Catalog Age lists the top 17 U.S. firms in annual catalog sales. Dell Computer is number one
followed by IBM and W.W. Grainger. Of the 17 firms on the list, 8 are in some type of computer-
related business. Suppose four firms are randomly selected.
a. What is the probability that none of the firms is in some type of computer-related business?
b. What is the probability that all four firms are in some type of computer-related business?
c. What is the probability that exactly two are in non-computer-related business?

Exercise #10

Suppose three positions are open in a company for which eight men and seven women have applied
for. Assuming each applicant is equally qualified for either position, what is the probability that
three men were selected for the position?

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Exercise #11

One theory concerning the Dow Jones Industrial Average is that it is likely to increase during U.S.
presidential election years. From 1964 through 2008, the Dow Jones Industrial Average increased in
9 of the 12 U.S. presidential election years. Assuming that this indicator is a random event with no
predictive value, you would expect that the indicator would be correct 50% of the time.
a. What is the probability of the Dow Jones Industrial Average increasing in 9 or more of the
12 U.S. presidential election years if the probability of an increase in the Dow Jones Industrial
Average is 0.50?
b. What is the probability that the Dow Jones Industrial Average will increase in 9 or more of
the 12 U.S. presidential election years if the probability of an increase in the Dow Jones Industrial
Average in any year is 0.75?