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ECON1203 - StatisticsChapter 7 Random variables & discrete probability

distributions

ECON1203 Statistics
Chapter 7 Random variables & discrete probability
distributions
Random variables

Random variable a function or rule that assigns a number to each

outcome (e.g. 1, 2, 3, )
Discrete random variable has a countable number of values (e.g.

number of people)
Continuous random variable has an uncountable number of values

(e.g. time, temp.)


Probability distribution shows the values of a random variable and
their probabilities

Discrete univariate probability distributions


Requirements of univariate distributions
1.

2.

0 P ( x ) 1[for all x]

P ( x )=1
all x

Describing univariate distributions


1.

Population mean=E ( X )== xP ( x )


allx

2.

3.

Population variance=V ( X )= = ( x ) P ( x)= x P ( x )


all x

all x

Population standard deviation= = 2

Laws of expected value (univariate distributions)


1.

E ( c )=c

2.

E ( X +c )=E ( X )+ c
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ECON1203 - StatisticsChapter 7 Random variables & discrete probability


distributions
3.

E ( cX )=cE ( X )

Laws of variance (univariate distributions)


1.

V ( c )=0

2.

V ( X +c )=V ( X )

3.

V ( cX )=c2 V ( X )

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ECON1203 - StatisticsChapter 7 Random variables & discrete probability


distributions

Discrete bivariate probability distributions


Requirements of bivariate distributions
1.

2.

0 P ( x , y ) 1 [ for all pairs of values ( x , y ) ]

P ( x , y )=1
all x all y

Describing bivariate distributions

( x X ) ( yY ) P ( x , y )

Covariance=COV ( X , Y )= xy

1.

all x all y

xyP ( x , y ) X Y
all x all y

2.

C oefficient of correlation= =

xy
x y

Laws of expected value & variance (bivariate distributions)


1.

E ( X +Y )=E ( X ) + E ( Y )

2.

V ( X +Y )=V ( X ) +V ( Y ) +2 COV ( X ,Y )

3.

If XY are independent , COV ( X ,Y )=0 ; V ( X +Y )=V ( X ) +V (Y )

Describing portfolios of two stocks


1.
2.

Mean=E ( R p )=w1 E ( R 1 ) +w 2 E ( R2 )
w21 V ( R1 ) +w 22 V ( R2 ) +2 w1 w 2 COV ( R 1 , R2)

Variance=V ( R p )

w21 V ( R1 ) +w 22 V ( R2 ) +2 w1 w 2 1 2
Describing portfolios of

stocks

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ECON1203 - StatisticsChapter 7 Random variables & discrete probability


distributions
k

1.

Mean=E ( R p )= wi E(Ri )

2.

Variance=V ( R p ) = w i i + 2

i=1

i=1

i=1 j=i+1

w i w j COV ( Ri , R j )

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ECON1203 - StatisticsChapter 7 Random variables & discrete probability


distributions

Binomial distribution
Requirements of binomial experiments

(n)

1. Fixed number of trials


2.

P ( success )= p

3.

P ( failure ) =1 p

4. Independent trials
Probability of

successes in a binomial experiment with

p :

probability of success

P( x)

n x

C x p ( 1 p )

n!
p x ( 1p )nx
x ! ( nx ) !

Cumulative probability =P (X x )
Using binomial tables
1.

P ( X x )=1P ( X [ x1 ] )

2.

P ( x )=P ( X x )P( [ x1 ] )

Describing binomial distributions


1.

Mean==np

2.

Variance= 2=np ( 1 p )

3.

Standard deviation= = np ( 1 p )

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trials and a