Recap: Random Variables

Recap
Random variables
Discrete random variable Continuous random variable
• Sample space is finite or • Sample space has infinitely many

countably many elements elements
• The probability function f(x) • The density function f(x) is a

Is often tabulated continuous function
• Calculation of probabilities • Calculation of probabilities

b
P( a < X < b) = ∑ f(t) P( a < X < b ) = ∫ a f(t) dt
a<t<b
1 lecture 3
Mean / Expected value
Definition
Definition:
Let X be a random variable with probability /
Density function f(x). The mean or expected value of X
is give by
μ = E( X) = ∑ x f ( x )
x
if X is discrete, and
∞
μ = E( X) = ∫ x f ( x )dx
−∞
if X is continuous.
2 lecture 3
Interpretation
Interpretation:
The total contribution of a value multiplied by the probability
of the value – a weighted average.
Example: Mean value= 1,5
f(x)
0.4
0.3
0.2
0.1
0 1 2 3 x
3 lecture 3
Example
Problem:
• A private pilot wishes to insure his plane valued at 1 mill kr.
• The insurance company expects a loss with the following
probabilities:
• Total loss with probability 0.001
• 50% loss with probability 0.01
1. What is the expected loss in kroner ?

2. What premium should the insurance company
ask if they want an expected profit of 3000 kr ?
4 lecture 3
Function of a random variable
Theorem:
Let X be a random variable with probability / density
function f(x). The expected value of g(X) is
μg( X ) = E [g( X)] = ∑ g( x ) f ( x )
x
∞
μg( X ) = E [g( X)] = ∫ g( x ) f ( x ) dx

−∞
if X is continuous.
5 lecture 3
Expected value
Linear combination
Theorem: Linear combination

Let X be a random variable (discrete or continuous), and
let a and b be constants. For the random variable aX + b
we have
E(aX+b) = aE(X)+b
6 lecture 3
Example
Problem:
• The pilot from before buys a new plane valued at 2 mill kr.
• The insurance company’s expected losses are unchanged:
• Total loss with probability 0.001
1. What is the expected loss for the new plane?
7 lecture 3
Function of a random variables
Definition:
Let X and Y be random variables with joint probability /
density function f(x,y). The expected value of g(X,Y) is
μg( X,Y ) = E [g( X, Y )] = ∑ ∑ g( x, y ) f ( x, y )

x y
if X and Y are discrete, and

∞ ∞
μg( X,Y ) = E [g( X, Y )] = ∫ ∫ g( x, y ) f ( x, y ) dx dy

−∞ −∞
if X and Y are continuous.
8 lecture 3
Function of two random variables
Problem:
Burger King sells both via “drive-in” and “walk-in”.
Let X and Y be the fractions of the opening hours that “drive-in” and “walk-
in” are busy.
Assume that the joint density for X and Y are given by
0 ≤ x≤ 1, 0≤y≤1
f(x,y) = { 4xy
0 otherwise
The turn over g(X,Y) on a single day is given by

g(X,Y) = 6000 X + 9000Y
What is the expected turn over on a single day?
9 lecture 3
Sums and products
Theorem: Sum/Product
Let X and Y be random variables then
E[X+Y] = E[X] + E[Y]
If X and Y are independent then

E[X.Y] = E[X] . E[Y]
10 lecture 3
Variance
Definition
Definition:
Let X be a random variable with probability / density
function f(x) and expected value µ. The variance of X is
then given
σ 2 = Var ( X) = E [( X − μ)2 ] = ∑ ( x − μ)2 f ( x )
x
∞
σ = Var ( X) = E [( X − μ) ] = ∫ ( x − μ)2 f ( x ) dx
2 2
−∞
if X is continuous.
The standard deviation is the positive root of the variance: σ = Var ( X)

11 lecture 3
Variance
Interpretation
The variance expresses, how dispersed the density /
probability function is around the mean.
f(x)
Varians = 0.5 f(x)
Varians = 2
0.5 0.5
0.4 0.4
0.3 0.3
0.2 0.2
0.1 0.1
1 2 3 x 0 1 2 3 4 x
Rewrite of the variance: σ 2 = Var ( X) = E [ X 2 ] − μ2
12 lecture 3
Variance
Linear combinations

Let X be a random variable, and let a be b constants.
For the random variable aX + b the variance is
Var (aX + b) = a 2 Var ( X)
Examples:
Var (X + 7) = Var (X)
Var (-X ) = Var (X)
Var ( 2X ) = 4 Var (X)
13 lecture 3
Covariance
Definition
Definition:
Let X and Y be to random variables with joint probability /
density function f(x,y). The covariance between X and Y is
σ XY = Cov( X, Y ) = E[( X − μX )( Y − μY )] = ∑ ∑ ( x − μX )( y − μY ) f ( x, y )
x y
if X and Y are discrete, and

∞ ∞
σ XY = Cov( X, Y ) = ∫ ∫ ( x − μX )( y − μY ) f ( x, y ) dx dy
−∞ −∞
if X and Y are continuous.
14 lecture 3
Covariance
Interpretation
Covariance between X and Y expresses how X and Y influence

each other.
Examples: Covariance between
• X = sale of bicycle and Y = bicycle pumps is positive.
• X = Trips booked to Spain and Y = outdoor temperature is negative.
• X = # eyes on red dice and Y = # eyes on the green dice is zero.
15 lecture 3
Covariance
Properties
Theorem:
The covariance between two random variables X and Y
with means µX and µY, respectively, is
σ XY = Cov( X, Y ) = E [ X Y ] − μX μY
Notice! Cov (X,X) = Var (X)

If X and Y are independent random variables, then
Cov (X,Y) = 0
Notice! Cov(X,Y) = 0 does not imply independence!
16 lecture 3
Variance/Covariace
Linear combinations

Let X and Y be random variables, and let a and b be
constants.
For the random variables aX + bY the variance is
Var (aX + bY ) = a 2 Var ( X) + b 2 Var ( Y ) + 2 a b Cov( X, Y )
Specielt: Var[X+Y] = Var[X] + Var[Y] +2Cov (X,Y)
If X and Y are independent, the variance is
Var[X+Y] = Var[X] + Var[Y]

17 lecture 3
Correlation
Definition
Definition:
Let X and Y be two random variables with covariance
Cov (X,Y) and standard deviations σX and σY, respectively.
The correlation coefficient of X and Y is
Cov( X, Y )
ρ XY =
σX σY
It holds that − 1 ≤ ρ XY ≤ 1
If X and Y are independent, then ρ XY = 0
18 lecture 3
Mean, variance, covariace
Collection of rules
Sums and multiplications of constants:

E (aX) = a E(X) Var(aX) = a2Var (X) Cov(aX,bY) = abCov(X,Y)
E (aX+b) = aE(X)+b Var(aX+b) = a2 Var (X)
Sum:
E (X+Y) = E(X) + E(Y) Var(X+Y) = Var(X) + Var(Y) + 2Cov(X,Y)
X and Y are independent: E(XY) = E(X) E(Y)

Var(X+Y) = Var(X) + Var(Y)
19 lecture 3

Recap: Random Variables

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Recap

Discrete random variable Continuous random variable

• Sample space is finite or • Sample space has infinitely many

• The probability function f(x) • The density function f(x) is a

• Calculation of probabilities • Calculation of probabilities

1. What is the expected loss in kroner ?

μg( X ) = E [g( X)] = ∫ g( x ) f ( x ) dx

Theorem: Linear combination

1. What is the expected loss for the new plane?

μg( X,Y ) = E [g( X, Y )] = ∑ ∑ g( x, y ) f ( x, y )

if X and Y are discrete, and

μg( X,Y ) = E [g( X, Y )] = ∫ ∫ g( x, y ) f ( x, y ) dx dy

if X and Y are continuous.

The turn over g(X,Y) on a single day is given by

If X and Y are independent then

The standard deviation is the positive root of the variance: σ = Var ( X)

Rewrite of the variance: σ 2 = Var ( X) = E [ X 2 ] − μ2

Theorem: Linear combination

if X and Y are discrete, and

if X and Y are continuous.

Covariance between X and Y expresses how X and Y influence

Examples: Covariance between

• X = sale of bicycle and Y = bicycle pumps is positive.

• X = Trips booked to Spain and Y = outdoor temperature is negative.

• X = # eyes on red dice and Y = # eyes on the green dice is zero.

Notice! Cov (X,X) = Var (X)

Notice! Cov(X,Y) = 0 does not imply independence!

Theorem: Linear combination

Specielt: Var[X+Y] = Var[X] + Var[Y] +2Cov (X,Y)

If X and Y are independent, the variance is

Var[X+Y] = Var[X] + Var[Y]

If X and Y are independent, then ρ XY = 0

Sums and multiplications of constants:

X and Y are independent: E(XY) = E(X) E(Y)

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