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MODELING &
SIMULATION
INTRODUCTION
P(E) = m/N
DEFINITION
Male, Female
Complement ==> sometimes, we want to know
the probability that an event will not happen; an
event opposite to the event of interest is called
a complementary event.
P(A) + P(AC) = 1
Views of Probability:
Subjective:
Ungrouped Grouped
Price (X) Frequency Price (X) Frequency
67.05 1 65.00-66.99 1
66.89 1 67.00-68.99 4
67.45 2 69.00-70.99 1
68.39 2 71.00-72.99 0
70.10 1 73.00-74.99 0
CENTRAL TENDENCY
In statistics, the term central tendency relates to
the way in which quantitative data tend to cluster
around a “central value”.
A measure of central tendency is any of a number
of ways of specifying this "central value.“
There are three important descriptive statistics that
gives measures of the central tendency of a variable:
The Mean
The Median
The Mode
THE MEAN
The arithmetic mean is the most commonly-used type of
average and is often referred to simply as the average.
In mathematics and statistics, the arithmetic mean (or simply
the mean) of a list of numbers is the sum of all numbers in the
list divided by the number of items in the list.
If the list is a statistical population, then the mean of that
population is called a population mean.
If the list is a statistical sample, we call the resulting statistic
a sample mean.
If we denote a set of data by X = (x1, x2, ..., xn), then the sample
mean is typically denoted with a horizontal bar over the variable
( X , enunciated "x bar").
The Greek letter μ is used to denote the arithmetic mean of
an entire population.
THE SAMPLE MEAN
In statistics, the mode is the value that occurs the most frequently in
a data set.
The mode is not necessarily unique, since the same maximum
frequency may be attained at different values.
Organize the price data in the previous example in ascending order
67.05, 66.89, 67.45, 67.45, 68.39, 68.39, 70.10
There are two modes in the given price data – 67.45 and 68.39
Thus the mode of the sample data is not unique
The sample price dataset may be said to be bimodal
A population or sample data may be unimodal, bimodal, or multimodal
STATISTICAL DISPERSION
Var ( X ) E[( X ) 2 ] x2
THE VARIANCE
Var ( X ) E[( X ) 2 ]
E[ X 2 2X 2 ]
E[ X 2 ] 2E[ X ] 2
E[ X 2 ] 2 2 2
E[ X 2 ] 2
E[ X 2 ] ( E[ X ]) 2
THE VARIANCE: PROPERTIES
X X
n
2
i
S x2 i 1
n 1
1
n 1
X1 X X 2 X ... X n X
2 2 2
THE SAMPLE VARIANCE
X X
n
2
X1 X X 2 X ... X n X
i
1 2 2 2
S
2 i 1
n 1 n 1
x
THE SAMPLE VARIANCE
For the hypothetical price data for Dec CME Live Cattle futures
contract, 67.05, 66.89, 67.45, 67.45, 68.39, 68.39, 70.10, the sample
variance can be calculated as
X X
n
2
i
S
2 i 1
n 1
x
1
7 1
67.05 67.96 ... 70.10 67.96
2 2
1.24
THE STANDARD DEVIATION
x x2 E [( X )2 ]
That is, the standard deviation σ (sigma) is the square root
of the average value of (X − μ)2.
THE STANDARD DEVIATION
X X
n
2
i
Sx S 2 i 1
1.24 1.114
n 1
x
THE MEAN ABSOLUTE DEVIATION
di (X X)
i
n n
is always zero. The positive and negative deviations cancel out in
the summation, which makes it a useless measure of dispersion.
The mean absolute deviation (MAD), calculated by:
d i (X i X )
n n
solves the “canceling out” problem.
THE MSD AND RMSD
di
2
X X 2
i
n n
The problem of squaring can be solved by taking the square root of
the MSD to obtain the root mean squared deviation (RMSD):
X X
n
2
i
RMSD MSD i 1
n
RMSD VS. STANDARD DEVIATION
X i X
n
2
RMSD MSD i 1
n
X X
n
2
i
Sx i 1
n 1
VARIANCE VS. MSD
STANDARD DEVIATION VS. RMSD
MAD = 0.86
Variance = 1.24 MSD = 1.06
Std. Dev. = 1.11 RMSD = 1.03
p 53
ASSOCIATION
33
THE COVARIANCE
E[ X .Y ] E[ X ].E[Y ] v
Cov( X , a ) 0
Cov( X , X ) Var ( X )
Cov( X , Y ) Cov(Y , X )
Cov(aX , bY ) abCov( X , Y )
Cov( X a, Y b) Cov( X , Y )
VARIANCE OF THE SUM OF CORRELATED
RANDOM VARIABLES
X X Yi Y
n
i
S x, y i 1
n 1 38
CORRELATION COEFFICIENT
Cov( X , Y ) X ,Y
x, y
Var ( X ) Var (Y ) X . Y
(X i X )(Yi Y )
rx , y i 1
(n 1) S x S y
CORRELATION COEFFICIENT
1 rx , y 1