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Lecture 7: Continuous Random Variable
Donglei Du([email protected])
Faculty of Business Administration, University of New Brunswick, NB Canada FrederictonE3B 9Y2
Donglei Du (UNB) ADM 2623: Business Statistics 1 / 53
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Table of contents
1 Continuous Random VariableProbability Density Function (pdf)Probability of any set of real numbers
2 Normal Random VariableStandard Normal Random VariableGeneral Normal Random Variable
3 Relationship between Z ∼ N(0, 1) and X ∼ N(µ, σ2)
4 Calculations with Standard Normal Random Variable via the NormalTable
Given z-value, calculate probabilityGiven probability, calculate z-value
5 Calculations with General Normal Random Variable via the NormalTable
Given x-value, calculate probabilityGiven probability, calculate x-value
Donglei Du (UNB) ADM 2623: Business Statistics 2 / 53
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Layout
1 Continuous Random VariableProbability Density Function (pdf)Probability of any set of real numbers
2 Normal Random VariableStandard Normal Random VariableGeneral Normal Random Variable
3 Relationship between Z ∼ N(0, 1) and X ∼ N(µ, σ2)
4 Calculations with Standard Normal Random Variable via the NormalTable
Given z-value, calculate probabilityGiven probability, calculate z-value
5 Calculations with General Normal Random Variable via the NormalTable
Given x-value, calculate probabilityGiven probability, calculate x-value
Donglei Du (UNB) ADM 2623: Business Statistics 3 / 53
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Continuous Random Variable
A continuous random variable is any random variable whose set of allthe possible values is uncountable.
Donglei Du (UNB) ADM 2623: Business Statistics 4 / 53
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Probability Density Function (pdf)
A probability density function (pdf) for any continuous randomvariable is a function f(x) that satisfies the following two properties:
(i) f(x) is nonnegative; namely,
f(x) ≥ 0
(ii) The total area under the curve defined by f(x) is 1; namely∫ ∞−∞
f(x)dx = 1
Donglei Du (UNB) ADM 2623: Business Statistics 5 / 53
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Probability of any set of real numbers
Given a continuous random variable X with its probability densityfunction f(x), for any set B of real numbers, the probability of B isgiven by
P (X ∈ B) =
∫Bf(x)dx
For instance, if B = [a, b], then the probability of B is given by
P (a ≤ X ≤ b) =∫ b
af(x)dx
Geometrically, the probability of B is the area under the curve f(x).
Donglei Du (UNB) ADM 2623: Business Statistics 6 / 53
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Example
Consider the continuous random variable X with its probabilitydensity function f(x) defined below
f(x) =
{2x, 0 ≤ x ≤ 1
0, x > 1
For instance, the probability of [1/3, 2/3] is given by
P (1/3 ≤ X ≤ 2/3) =
∫ 2/3
1/32xdx = (2/3)2 − (1/3)2 = 1/3.
Geometrically, the probability of [1/3, 2/3] is the area under the curvef(x) between [1/3, 2/3] .
Donglei Du (UNB) ADM 2623: Business Statistics 7 / 53
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Example
)(xf
2
1
1x
31
32
Donglei Du (UNB) ADM 2623: Business Statistics 8 / 53
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Note
When dealing with a continuous random variable, we assume that theprobability that the variable will take on any particular value is 0!Instead, probabilities are assigned to intervals of values!
Therefore, give a continuous random variable X, then for anyconstant a:
P (X = a) = 0
Donglei Du (UNB) ADM 2623: Business Statistics 9 / 53
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Layout
1 Continuous Random VariableProbability Density Function (pdf)Probability of any set of real numbers
2 Normal Random VariableStandard Normal Random VariableGeneral Normal Random Variable
3 Relationship between Z ∼ N(0, 1) and X ∼ N(µ, σ2)
4 Calculations with Standard Normal Random Variable via the NormalTable
Given z-value, calculate probabilityGiven probability, calculate z-value
5 Calculations with General Normal Random Variable via the NormalTable
Given x-value, calculate probabilityGiven probability, calculate x-value
Donglei Du (UNB) ADM 2623: Business Statistics 10 / 53
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Standard Normal Random Variable
The standard normal random variable Z has the following probabilitydensity function:
φ(z) =1√2π
e−12z2 .
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
Donglei Du (UNB) ADM 2623: Business Statistics 11 / 53
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Standard normal curve: Plot R code
> x<-seq(-4,4,length=200)
>y<-dnorm(x,mean=0,sd=1)
> plot(x,y,type="l",lwd=2,col="red")
Donglei Du (UNB) ADM 2623: Business Statistics 12 / 53
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Properties of Standard Normal Random Variable
The pdf is symmetric around its mean x = 0, which is at the sametime the mode, the median of the distribution.
It is unimodal.
It has inflection points at +1 and -1.
Z has zero mean and unit variance; namely
E[Z] = 0
V[Z] = 1
Donglei Du (UNB) ADM 2623: Business Statistics 13 / 53
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General Normal Random Variable
A general normal distribution has the following probability densityfunction for any given parameters µ and σ ≥ 0:
f(x) =1√2πσ
e−12(
x−µσ )
2
.
The normal distribution is also often denoted as
X ∼ N (µ, σ2).
Donglei Du (UNB) ADM 2623: Business Statistics 14 / 53
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General Normal Random Variable: µ = 10 and σ = 2
4 6 8 10 12 14 16
0.00
0.05
0.10
0.15
0.20
x
y
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General normal curve: Plot R code
> mu<-10
>sigma<-2
>x<-seq(mu-3*sigma,mu+3*sigma,length=200)
>y<-dnorm(x,mean=mu,sd=sigma)
>plot(x,y,type="l",lwd=2,col="red")
Donglei Du (UNB) ADM 2623: Business Statistics 16 / 53
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Properties of Standard Normal Random Variable
The pdf is symmetric around its mean x = µ, which is at the sametime the mode, the median of the distribution.
It is unimodal.
It has inflection points at µ± σ.
X has mean µ and variance σ; namely
E[Z] = µ
V[Z] = σ
The 68-95-99.7 (empirical) rule, or the 3-sigma rule: About 68%of values drawn from a normal distribution are within one standarddeviation away from the mean; about 95% of the values lie withintwo standard deviations; and about 99.7% are within three standarddeviations.
Donglei Du (UNB) ADM 2623: Business Statistics 17 / 53
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Layout
1 Continuous Random VariableProbability Density Function (pdf)Probability of any set of real numbers
2 Normal Random VariableStandard Normal Random VariableGeneral Normal Random Variable
3 Relationship between Z ∼ N(0, 1) and X ∼ N(µ, σ2)
4 Calculations with Standard Normal Random Variable via the NormalTable
Given z-value, calculate probabilityGiven probability, calculate z-value
5 Calculations with General Normal Random Variable via the NormalTable
Given x-value, calculate probabilityGiven probability, calculate x-value
Donglei Du (UNB) ADM 2623: Business Statistics 18 / 53
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Relationship between Z ∼ N(0, 1) and X ∼ N(µ, σ2)
Given X ∼ N(µ, σ2), then
Z =X − µσ
∼ N(0, 1)
Given Z ∼ N(0, 1), then
X = µ+ σZ ∼ N(µ, σ2)
Donglei Du (UNB) ADM 2623: Business Statistics 19 / 53
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Layout
1 Continuous Random VariableProbability Density Function (pdf)Probability of any set of real numbers
2 Normal Random VariableStandard Normal Random VariableGeneral Normal Random Variable
3 Relationship between Z ∼ N(0, 1) and X ∼ N(µ, σ2)
4 Calculations with Standard Normal Random Variable via the NormalTable
Given z-value, calculate probabilityGiven probability, calculate z-value
5 Calculations with General Normal Random Variable via the NormalTable
Given x-value, calculate probabilityGiven probability, calculate x-value
Donglei Du (UNB) ADM 2623: Business Statistics 20 / 53
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The normal table
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Given z-value, calculate probability
Example: Calculate the area between 0 and 1.23.
Solution: The area is equal to the probability between 0 and 1.23under the standard normal curve. So from the table
P (0 ≤ Z ≤ 1.23) = 0.3907.
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
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R code
> mu<-1
>sigma<-0
> pnorm(1.23, mean=mu, sd=sigma)-0.5
#[1] 0.3906514
Or simply run the following code for the standard normal distributionwhere µ = 0 and σ = 1
> pnorm(1.23)-0.5
#[1] 0.3906514
Donglei Du (UNB) ADM 2623: Business Statistics 23 / 53
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Given z-value, calculate probability
Example: Calculate the area between -2.15 and 2.23.Solution: The area is equal to the probability between -2.15 and 1.23under the standard normal curve. So from the table
P (−2.15 ≤ Z ≤ 2.23) = P (−2.15 ≤ Z ≤ 0) + P (0 ≤ Z ≤ 2.23)
= P (0 ≤ Z ≤ 2.15) + P (0 ≤ Z ≤ 2.23)
= 0.4842 + 0.4871 = 0.9713
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
Donglei Du (UNB) ADM 2623: Business Statistics 24 / 53
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R code
> z1<--2.15
> z2<-2.23
> mu<-0
> sigma<-1
> pnorm(z2, mean=mu, sd=sigma)-pnorm(z1, mean=mu, sd=sigma)
[1] 0.9713487
Donglei Du (UNB) ADM 2623: Business Statistics 25 / 53
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Given probability, calculate z-value
Example: Given the area between 0 and z is 0.3264, find z.
Solution: We want to find z such that
P (0 ≤ Z ≤ z) = 0.3264
From the table, we find z = 0.94.
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
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R code
>p<-0.3264
>qnorm(p+0.5)
[1] 0.9400342
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Given probability, calculate z-value
Example: Given the area between less than z is 0.95, find z.
Solution: We want to find z such that
P (Z ≤ z) = 0.95⇔ P (0 ≤ Z ≤ z) = 0.95− 0.5 = 0.45
From the table, we find z = 1.65.
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
Donglei Du (UNB) ADM 2623: Business Statistics 28 / 53
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R code
>p<-0.95
>qnorm(p)
[1] 1.644854
Donglei Du (UNB) ADM 2623: Business Statistics 29 / 53
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Layout
1 Continuous Random VariableProbability Density Function (pdf)Probability of any set of real numbers
2 Normal Random VariableStandard Normal Random VariableGeneral Normal Random Variable
3 Relationship between Z ∼ N(0, 1) and X ∼ N(µ, σ2)
4 Calculations with Standard Normal Random Variable via the NormalTable
Given z-value, calculate probabilityGiven probability, calculate z-value
5 Calculations with General Normal Random Variable via the NormalTable
Given x-value, calculate probabilityGiven probability, calculate x-value
Donglei Du (UNB) ADM 2623: Business Statistics 30 / 53
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Given x-value, calculate probability
Example: Given a normal random variable X ∼ N(50, 82), calculatethe area between 50 and 60.Solution: The area is equal to the probability between 50 and 60under the normal curve.
P (50 ≤ X ≤ 60) = P
(50− 50
8≤ X − µ
σ≤ 60− 50
8
)= P (0 ≤ Z ≤ 1.25) = 0.394
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
Donglei Du (UNB) ADM 2623: Business Statistics 31 / 53
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R code
> pnorm(1.25)-0.5
[1] 0.3943502
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Given x-value, calculate probability
Example: Given a normal random variable X ∼ N(50, 82), calculatethe area between 40 and 60.Solution: The area is equal to the probability between 40 and 60under the normal curve.
P (40 ≤ X ≤ 60) = P
(40− 50
8≤ X − µ
σ≤ 60− 50
8
)= P (−1.25 ≤ Z ≤ 1.25) = 2P (0 ≤ Z ≤ 1.25)
= 2(0.394) = 0.688
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
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R code
> pnorm(1.25)-pnorm(-1.25)
[1] 0.7887005
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Given probability, calculate x-value
Example: Given a normal random variable X ∼ N(50, 82), and thearea below x is 0.853, find x?
Solution: We want to find x such that
P (X ≤ x) = 0.853 ⇔ P
(X − µσ
≤ x− µσ
)= 0.853
⇔ P (Z ≤ z) = 0.853
⇔ P (0 ≤ Z ≤ z) = 0.853− 0.5 = 0.353,
where
z :=x− µσ
From the table, we find z = 1.05, implying that
x = µ+ zσ = 50 + 1.05(8) = 58.4
Donglei Du (UNB) ADM 2623: Business Statistics 35 / 53
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Plot
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
Donglei Du (UNB) ADM 2623: Business Statistics 36 / 53
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R code
>p<-0.853
>qnorm(p)
[1] 1.049387
Donglei Du (UNB) ADM 2623: Business Statistics 37 / 53
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Practical example
Example: Professor X has determined that the scores in his statisticscourse are approximately normally distributed with a mean of 72 anda standard deviation of 5. He announces to the class that the top 15percent of the scores will earn an A.
Problem: What is the lowest score a student can earn and stillreceive an A?
Donglei Du (UNB) ADM 2623: Business Statistics 38 / 53
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Practical example
Solution: Let X be the students’ scores. Then X ∼ N(72, 52). Letx be the score that separates an A from the rest. Then
P (X ≥ x) = 0.15 ⇔ P
(X − µσ
≥ x− µσ
)= 0.15
⇔ P (Z ≥ z) = 0.15
⇔ P (0 ≤ Z ≤ z) = 0.5− 0.15 = 0.35,
where
z :=x− µσ
From the table, we find z = 1.04, implying that
x = µ+ zσ = 72 + 1.04(5) = 77.2
Donglei Du (UNB) ADM 2623: Business Statistics 39 / 53
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Plot
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
Donglei Du (UNB) ADM 2623: Business Statistics 40 / 53
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R code
>p<-0.85
>qnorm(p)
[1] 1.036433
Donglei Du (UNB) ADM 2623: Business Statistics 41 / 53
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Practical example
Example: A manufacturer of aircraft is likely to be very concernedabout the ability of potential users to use the product. If a lot ofpilots cannot reach the rudder pedals or the navigation systems, thenthere is trouble. Suppose a manufacturer knows that the lengths ofpilot’s legs are normally distributed with mean 76 and standarddeviation of 5 cm.
Problem: If the manufacturer wants to design a cockpit such thatprecisely 90% of pilots can reach the rudder pedals with their feetwhile seated, what is the desired distance between seat and pedals?
Donglei Du (UNB) ADM 2623: Business Statistics 42 / 53
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Practical example
Solution: Let X be the the lengths of pilot’s legs. ThenX ∼ N(76, 52). Let x be the desired distance. Then
P (X ≥ x) = 0.90 ⇔ P
(X − µσ
≥ x− µσ
)= 0.90
⇔ P (Z ≥ z) = 0.90
⇔ P (z ≤ Z ≤ 0) = 0.9− 0.5 = 0.4
⇔ P (0 ≤ Z ≤ −z) = 0.4
where
z :=x− µσ
From the table, we find z = −1.28, implying that
x = µ+ zσ = 76− 1.28(5) = 69.6
Donglei Du (UNB) ADM 2623: Business Statistics 43 / 53
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Plot
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
Donglei Du (UNB) ADM 2623: Business Statistics 44 / 53
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R code
>p<-0.10
>qnorm(p)
[1] -1.281552
Donglei Du (UNB) ADM 2623: Business Statistics 45 / 53
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Practical example
Example: Suppose that a manufacturer of aircraft engines knowstheir lifetimes to be a normally distributed random variable with amean of 2,000 hours and a standard deviation of 100 hours
Problem: What is the probability that a randomly chosen engine hasa lifetime between 1,950 and 2,150 hours?
Donglei Du (UNB) ADM 2623: Business Statistics 46 / 53
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Practical example
Solution: Let X be the lifetimes of their aircraft engines. ThenX ∼ N(2000, 1002). Then
P (1950 ≤ X ≤ 2150)
= P
(1950− 2000
100≤ X − µ
σ≤ 2150− 2000
100
)= P (−0.5 ≤ Z ≤ 1.5) = P (0 ≤ Z ≤ 0.5) + P (0 ≤ Z ≤ 1.5)
= 0.1915 + 0.4332 = 0.6247.
Donglei Du (UNB) ADM 2623: Business Statistics 47 / 53
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Plot
−4 −2 0 2 4
0.0
0.1
0.2
0.3
0.4
x
y
Donglei Du (UNB) ADM 2623: Business Statistics 48 / 53
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R code
> z1<--0.5
> z2<-1.5
> pnorm(z2)-pnorm(z1)
[1] 0.6246553
Donglei Du (UNB) ADM 2623: Business Statistics 49 / 53
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The Probability of a market Crash
Example: Suppose that the annualized S&P 500 index returns,µ ≈ 12% and σ ≈ 15%.
Problem: A negative surprise: on October 19, 1987, the S&P 500index dropped more than 23% on one day. What is the probability forsuch a event?
Donglei Du (UNB) ADM 2623: Business Statistics 50 / 53
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Solution
Solution: Let r denote the daily return, then r is normally distributedwith
mean0.12/252 ≈ 0.00048,
and standard deviation
0.15/√252 = 0.0094.
Namely r ∼ N(0.00048, 0.00942). Then
P (r ≤ −0.23)
= P
(r − µσ≤ −0.23− 0.00048
0.0094
)= P (Z ≤ −24) ≈ 10−127.
Donglei Du (UNB) ADM 2623: Business Statistics 51 / 53
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The empirical rule
We now derive the empirical rule (Back in Lecture 4) from theNormal table: assume X ∼ N(µ, σ2), then
P (µ− kσ ≤ X ≤ µ− kσ) = P(−k ≤ X − µ
σ≤ k
)= P(−k ≤ Z ≤ k)
For k = 1, 2, 3, we obtain 0.68, 0.95, and 99.7 from the Normal table.
Donglei Du (UNB) ADM 2623: Business Statistics 52 / 53