Lecture 2

ECMT1020-Business and Economic Statistics B
Nektarios Aslanidis
Semester 2, 2014
Lecture 2: Review of statistics 2
Aslanidis (University of Sydney) Review of statistics 2
Semester 2, 2014 Lecture 2: Review of statistics 2 1
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Expected value: a measure of central tendency
Expected value (or mean value or average) for a discrete random
variable
E(X) =
n
i =1
x
i
f (x
i
) = x
1
f (x
1
) + x
2
f (x
2
) + ... + x
n
f (x
n
)
where f (x
i
) are the weights. Note that special case of equal weights,
f (x
i
) = 1/n (i = 1, ..., n) (Sample mean)
E(X) = x
1
f (x
1
) + x
2
f (x
2
) + ... + x
n
f (x
n
) =
(x
1
+ x
2
+ ... + x
n
)
n
Example
B.1 (Table B-1 and Figure B-1).
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Properties of expected value
1.
E(b) = b
where b is a constant.
2.
E(X + Y) = E(X) + E(Y)
E(X Y) = E(X) + E(Y) = E(X) E(Y)
3.
E(
X
Y
) 6=
E(X)
E(Y)
E is a linear operator.
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Properties of expected value
4.
E(XY) 6= E(X)E(Y)
Only if X and Y are independent
E(XY) = E(X)E(Y)
5.
E(X
2
) 6= [E(X)]
2
6.
E(aX) = aE(X)
E(a + bX) = a + bE(X)
E is a linear operator.
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Multivariate (bivariate) probability PMF (or PDF)
E(XY) =
x

y
xyf (X, Y)
Example
B.3 PC/printer (Table A-3)
E(XY) = (1)(1)(0.05) + (1)(2)(0.02) + ...(4)(4)(0.15) = 7.06
If independent,
E(XY) = E(X)E(Y) = (2.6)(2.35) = 6.11 6= 7.06
E(X) = 2.6, E(Y) = 2.35
Thus, not independent.
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Variance: a measure of dispersion
Denition (variance of a random variable)
Var (X) =
2
x
= E(X
x
)
2
- - Figure B-2 - -
Standard deviation
x
=
q
Var (X)
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How to compute the variance of a discrete random variable
Var (X) =
x
(X
x
)
2
f (X)
Example
B.4 (Table B-2)
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Properties of variance
1.
Var (b) = 0
2. If X and Y are independent
Var (X + Y) = Var (X) + Var (Y)
Var (X Y) = Var (X) + Var (Y)
= Var (X) + (1)
2
Var (Y)
= Var (X) + Var (Y)
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3.
Var (X + b) = Var (X)
4.
Var (aX) = a
2
Var (X)
5.
Var (aX + b) = a
2
Var (X)
6. If X and Y are independent
Var (aX + bY) = a
2
Var (X) + b
2
Var (Y)
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7.
Var (X) = E(X E(X))
2
= E

X
2
+ [E(X)]
2
2XE(X)
= E(X
2
) + E[E(X)]
2
E(2E(X)X)
= E(X
2
) + E[(X)]
2
2E(X)E(X)
= E(X
2
) + [E(X)]
2
2[E(X)]
2
E(X
2
) [E(X)]
2
where
E(X
2
) =
x
x
2
f (X)
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Correlation of variation (a measure of relative variation)
V =

x
x
100
Example
B.6
In ECMT 1020, the mid-sem exam was: stream 1 (mean 40 with standard
deviation 5) and stream 2 (mean 50 with standard deviation of 6). Which
stream performs relatively better (less variation)?
V
1
=

1
1
=
5
40
= 0.125
V
2
=

2
2
=
6
50
= 0.12
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Covariance
Denition
cov(X, Y) = E(X
x
)(Y
y
)
= E(XY X
y

x
Y +
x
y
)
= E(XY) E(
y
X) E(
x
Y) + E(
x
y
)
= E(XY)
y
E(X)
x
E(Y) + E(
x
y
)
= E(XY)
y
x

x
y
+
x
y
= E(XY)
y
x
Can be positive, negative, or zero. If, however, zero ! no linear
relationship!
Covariance is unbounded, < cov(X, Y) < .
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Covariance
Denition (covariance of a discrete random variable)
cov(X, Y) =

x

y
(X
x
)(Y
y
)f (X, Y)
=

x

y
XYf (X, Y)
x
y
= E(XY)
x
y
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Covariance
Properties of covariance
1. If X and Y are independent, cov(X, Y) = 0
E(XY) = E(X)E(Y) =
x
y
2.
cov(a + bX, c + dY) = cov(bX, dY) = E(bX b
x
)(dY d
y
)
= bdE(X
x
)(Y
y
)
bdcov(X, Y)
3.
cov(X, X) = E(X
x
)(X
x
) = E(X
x
)
2
= Var (X)
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Covariance
Properties of covariance
4. If X and Y are NOT independent
Var (X + Y) = Var (X) + Var (Y) + 2cov(X, Y)
Var (X + Y + Z) = Var (X) + Var (Y) + Var (Z)
+2cov(X, Y) + 2cov(X, Z) + 2cov(Y, Z)
Var (X Y) = Var (X) + Var (Y) 2cov(X, Y)
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Correlation
Correlation coecient
=
cov(X, Y)
y
1 1
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Correlation
Properties
1. Has the same sign as the covariance.
2. Measures linear relationship, but not nonlinear relationship.
3. If = 1 ! perfect positive linear relationship (Y = a + bX,
b > 0).
If = 1 ! perfect negative linear relationship (Y = a + bX,
b < 0).
If = 0 ! No linear relationship (Y = a, b = 0).
4. Correlation does not depend on the units in which the original
variables are measured.
5. Correlation does not imply causality.
- - Figure B-3 - -
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Correlation
Variances of correlated variables
Var (X + Y) = Var (X) + Var (Y) + 2
x
y
Var (X Y) = Var (X) + Var (Y) 2
x
y
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Conditional expectation
Denition
E(X/Y = y) =
x
Xf (X/Y = y)
E(Y/X = x) =
y
Yf (Y/X = x)
Example
B.9 (PC/printer example, Table A-3)
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Conditional expectation
Law of Iterated Expectations
E[Y] = E[E(Y/X)]
Relation between conditional and unconditional mean.
Intuition
E[Y] = f (X = x
1
)E(Y/X = x
1
) + ... + f (X = x
n
)E(Y/X = x
n
)
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Conditional variance
Denition
Var (Y/X = x)
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Skewness and kurtosis
Skewness is a measure of asymmetry, while kurtosis is a measure of
tallness (or atness).
Moments
First moment : E(X) =
x
Second moment : E(X
x
)
2
Third moment : E(X
x
)
3
Fourth moment : E(X
x
)
4
rth moment : E(X
x
)
r
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Denition of skewness
S =
E(X
x
)
3
3
x
=
third moment about the mean
cube of standard deviation
Denition of kurtosis
K =
E(X
x
)
4
[
2
x
]
2
=
fourth moment about the mean
square of variance
- - Figure B-4 - -
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Formulas for discrete random variables
third moment :

x
(X
x
)
3
f (X)
fourth moment :

x
(X
x
)
4
f (X)
Example
B.10
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Sample moments
Sample mean
_
X =

n
i =1
X
i
n
The sample mean is the estimator of the population mean.
Sample variance
S
2
x
=

n
i =1
(X
i

_
X)
2
n 1
The sample variance is the estimator of the population variance.
Why do we divide by n-1?
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Sample moments
Sample covariance
Sample cov(X, Y) =

n
i =1
(X
i

_
X)(Y
i

_
Y)
n 1
The sample covariance is the estimator of the population covariance.
Example
B.11 (Table B-3)
Sample correlation coecient
r =

n
i =1
(X
i

_
X)(Y
i

_
Y)/(n 1)
q
n
i =1
(X
i

_
X)
2
/(n 1)
q
n
i =1
(Y
i

_
Y)
2
/(n 1)
=

n
i =1
(X
i

_
X)(Y
i

_
Y)
q
n
i =1
(X
i

_
X)
2
q
n
i =1
(Y
i

_
Y)
2
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Sample moments
Sample skewness and kurtosis
Sample third moment :

n
i =1
(X
i

_
X)
3
n 1
Sample fourth moment :

n
i =1
(X
i

_
X)
4
n 1
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Bibliography
Appendix B from Gujarati Damodar N. and Dawn C. Porter (2010),
Essentials of Econometrics, 4th ed, McGraw-Hill.
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ECMT1020-Business and Economic Statistics B

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