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Random Variables

The document discusses random variables and probability distributions. It defines discrete and continuous random variables and how they take values. It also discusses probability distributions which show how total probability is distributed among possible values of a variable. The document gives examples of expectations and variances as ways to summarize distributions and discusses using these concepts in risk assessment.

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Abhishek Parmar
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18 views

Random Variables

The document discusses random variables and probability distributions. It defines discrete and continuous random variables and how they take values. It also discusses probability distributions which show how total probability is distributed among possible values of a variable. The document gives examples of expectations and variances as ways to summarize distributions and discusses using these concepts in risk assessment.

Uploaded by

Abhishek Parmar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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RANDOM VARIABLES and PROBABILITY

DISTRIBUTIONS
Raw Data: Discrete
Consider the data on the number of customers that visit a
store in a day.
Day # of
customer
s
1 23
2 4
3 1
4 8
: :
: :
● Notice responses vary from one constituency to another. Thus, the
response of each (randomly selected) day is a variable.
Discrete Variable
• A variable associates each value of the sample space with a
number (on the number line).

• Refer to the number of customers example: The variable is:


Number of customers visiting a store on a particular day.

Let’s define the variable by X. X takes values – 0, 1, 2, 3,


….

• The problem of interest is: What is the probability that


the number of customers visiting a store on a day is at
least 10?
Raw Data: Continuous
● Consider
the dataset depicting the scores received by
employees from their HR manager:
Person Score

1 91.8
2 84.9
3 91.7
4 90.1
: :
: :

● Noticethe scores vary from one employee to another. Thus,


the scores of each (randomly selected) employee is a variable.
Continuous Variable

• We denote X as the score received by an employee.

X may take any value between 0 and 100 and the number
of possible values that X may take is not countable.

• The problems of interest are:


(a) What is the probability that an employee receives at least
93?
(b) What is the 95 percentile of the scores?
Relative Frequency Table
Consider the data on scores (out of 100) received by
employees of a company from their HR Manager.
Relative Frequency Histogram
of 5000 employees
Random Variables

● Examples:
● Number of defective items in a batch of 25 TV sets
● Gender of a customer purchasing a mobile phone
● Time between the customer arrivals at a service facility
● Closing stock price of Infosys on a particular day
● CAT score of a randomly selected student from PGP I.

● Discrete random variable can only take countable number of


values while Continuous random variable takes infinite number
of values.
Probability Distribution

● Each Random Variable behaves in some pattern.

● The pattern is captured using Probability Distribution.

● Probability Distribution: How total probability is distributed


among all possible values that the variables can take.

● The Distribution can either be Discrete or Continuous


depending on the type of random variable.
Probability Distribution Contd.

● For Continuous random variables, the probability


that the random variable takes a certain value is 0.

● (Dicarlo Motors) The probability distribution for the


number of automobiles sold during a day at Dicarlo
Motors is
k 0 1 2 3
P(X=k) 0.2 0.15 0.25 0.4
● Is this a valid probability distribution?
● Find the probability that more than 1 car will
be sold in a day.
Summaries of Distributions: Expectation
● Average of a probability distribution (also called
expectation). Denoted by either µ or E(X), where X is
the random variable.
● For Discrete random variable, E(X)=
● If P(X = c) = 1, then E(X) = c.
● A trip insurance policy pays Rs 20000 to the customer in
case of a loss due to theft or damage. If the risk of such
a loss is 1 in 200, what is the expected cost, per
customer, to cover?
● An ATM allows customers to make withdrawals of Rs.
500, Rs. 2000 and Rs. 100 with probabilities 0.15, 0.50,
0.35 respectively. What is the expected amount of
withdrawal by a customer?
Summaries of Distributions: Variance

● Just Expectation is not enough, variance also


characterizes a distribution.

● The variance of a distribution is denoted by or


V(X).

● V(X)=
Risk Assessment

● You visit a casino in Goa where a game goes like this: to play
the game each time you have to deposit Rs. 1000 at the
counter. A die will be thrown. If it turns out 1 or 2, your return is
Rs. 1500. If the outcome is 3 or 4, you get Rs.1000. If it is 5 or
6, the return is Rs. 500. After observing the game 100 times,
you find the frequencies of each return as follows. Do you think
playing this game is wise?

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