LESSON 5 Probability Distributions

Probability distributions describe how the values of a random variable are distributed.
Among these, the normal distribution is one of the most important and widely used in statistics.
Here we will discuss the normal distribution and its properties, how to visualize and analyze
probability distributions using SPSS and Excel, and the applications of the normal distribution in
business.

Normal Distribution and Its Properties

• Definition: The normal distribution, also known as the Gaussian distribution, is a
continuous probability distribution characterized by its bell-shaped curve. It is symmetrical
about the mean.

Properties:
1. Symmetry: The distribution is symmetric around the mean μ.

▪ In data analysis, if the data is normally distributed, it means the mean, median, and
mode are all equal and located at the center of the distribution. This helps in
understanding that the data is evenly distributed around the central value.
▪ In performance evaluation, knowing that data is symmetric allows analysts to use the
mean as a reliable measure of central tendency.

2. Mean, Median, and Mode: In a normal distribution, the mean, median, and mode are all
equal and located at the center of the distribution.

3. Bell-Shaped Curve: The curve is bell-shaped and extends infinitely in both directions,
approaching but never touching the horizontal axis.
▪ The bell-shaped curve indicates that most of the data points are concentrated around
the mean, with fewer data points as you move away from the mean.
▪ In quality control, the bell-shaped curve helps in identifying that most products or
processes perform near the average level, with fewer instances of extreme
performance.
4. 68-95-99.7 / Empirical Rule: Approximately 68% of the data falls within one standard
deviation (σ) of the mean, 95% within two standard deviations, and 99.7% within three
standard deviations.
▪ This rule allows analysts to understand the distribution of data around the mean in a
predictable manner. Approximately 68% of data falls within one standard deviation,
95% within two, and 99.7% within three.
▪ In finance, this rule is used to assess risk. For instance, an investor can predict that
about 95% of the time, the returns on an investment will fall within two standard
deviations of the mean return, providing a measure of expected variability.

**Typical Standard Normal Distribution

5. Asymptotic: The tails of the distribution approach the horizontal axis but never touch it.
▪ The tails of the normal distribution approaching the horizontal axis but never touching
imply that extreme values are possible but rare.
▪ In risk management, this property helps in understanding that while extreme events
(like financial crashes or exceptional profits) are unlikely, they are still possible and
should be considered in risk assessments.

6. Standard Normal Distribution: A normal distribution with a mean of 0 and a standard

deviation of 1 is called the standard normal distribution. It is denoted as N(0,1).
▪ Converting a normal distribution to the standard normal distribution (with mean 0 and
standard deviation 1) using z-scores allows for comparison across different datasets
and standardizes analyses.
What are z-scores?
A z-score measures exactly how many standard deviations above or below the mean a data
point is.
Here's the formula for calculating a z-score:

Here's the same formula written with symbols:

Here are some important facts about z-scores:

• A positive z-score says the data point is above average.
• A negative z-score says the data point is below average.
• A z-score close to 0 says the data point is close to average.
• A data point can be considered unusual if its z-score is above or below 3 .

Example 1
The grades on a history midterm at Almond have a mean of 85 and a standard deviation of 2 .
Michael scored 86 on the exam.

Find the z-score for Michael's exam grade.

Michael's z-score is 0.5. His grade was half of a standard deviation above the mean.

Example 2
The grades on a midterm have a mean of 82 and a standard deviation of 4 .
Michael scored 74 on the exam.
Find the z-score for Michael's exam grade.

Michael's z-score is -2 . His grade was two standard deviations below the mean.
Practical Applications and Examples
1. Quality Control and Process Improvement
▪ Example: A factory producing light bulbs can use the normal distribution to monitor
the lifetime of the bulbs. By understanding the mean lifetime and standard deviations,
the factory can identify if the production process is consistent or if there are defects.
2. Finance and Investment Analysis
▪ Example: Analyzing stock returns with the normal distribution helps in understanding
the expected return and risk. Using the 68-95-99.7 rule, investors can predict the
range within which future returns are likely to fall.
3. Healthcare and Epidemiology
▪ Example: In epidemiology, the normal distribution can be used to analyze the spread
of a disease. Understanding the mean and variability of the incubation period helps in
predicting and managing outbreaks.
4. Real Estate Market Analysis
▪ Example: Real estate analysts use the normal distribution to understand the
distribution of house prices in a given area. By analyzing the mean and standard
deviation of house prices, they can provide better pricing strategies and investment
advice.
5. Education and Testing
▪ Example: Standardized test scores are often normally distributed. Educators and
psychologists use the normal distribution to interpret test scores and understand
student performance relative to the population.

REVIEW QUESTIONS (Empirical Rule)

Problem 1. In a normal distribution, the mean is 70 and the standard deviation is 5.
What percentage of data falls between 65 and 75?
Solution: Using the 68-95-99.7 rule:
• 65 and 75 are one standard deviation away from the mean (70 ± 5).
• According to the rule, approximately 68% of the data falls within one standard
deviation of the mean.
Answer: 68%
Problem 2. For a normal distribution with a mean of 50 and a standard deviation of 10, what
range of values contains approximately 95% of the data?
Solution: Using the 68-95-99.7 rule:
• Approximately 95% of the data falls within two standard deviations of the mean.
• Two standard deviations from the mean are calculated as:
50−2(10)=30 and 50+2(10)=70
Answer: The range is 30 to 70.

Problem 3. If the mean of a dataset is 100 and the standard deviation is 15, what
percentage of data lies between 55 and 145?
Solution: Using the 68-95-99.7 rule:
• The range 55 to 145 represents three standard deviations from the mean (100 ± 3(15)).
• According to the rule, approximately 99.7% of the data falls within three standard
deviations of the mean.
Answer: 99.7%
Problem 4: A dataset has a normal distribution with a mean of 80 and a standard
deviation of 20. What is the probability that a randomly selected value from this
dataset is between 40 and 120?
Solution: Using the 68-95-99.7 rule:
• The range 40 to 120 represents two standard deviations from the mean (80 ±
2(20)).
• According to the rule, approximately 95% of the data falls within two standard
deviations of the mean.
Answer: 95%

Problem 5 In a normally distributed dataset with a mean of 60 and a standard deviation

of 8, what is the probability that a value is less than 44 or greater than 76?
Solution: Using the 68-95-99.7 rule:
• The range 44 to 76 represents two standard deviations from the mean (60 ± 2(8)).
• According to the rule, approximately 95% of the data falls within this range.
• Therefore, the probability that a value lies outside this range is:
100%−95%=5%
• Since this probability is symmetric, the probability that a value is less than 44 or
greater than 76 is split equally between the two tails:

Answer: 2.5%
Using SPSS and Excel to Visualize and Analyze Probability Distributions
SPSS:
1. Visualizing Normal Distribution:
o Data Entry: Enter your data into SPSS Data View.
o Histogram: Go to Graphs > Chart Builder, select Histogram, and drag it to the
chart preview area. Specify the variable you want to plot.
o Normal Curve: Check the option to display the normal curve in the histogram
properties.
o Example: Plotting the test scores of students to see if they follow a normal
distribution.
2. Analyzing Normal Distribution:
o Descriptive Statistics: Go to Analyze > Descriptive Statistics > Descriptives to
get the mean, standard deviation, skewness, and kurtosis.
o Normality Tests: Use Analyze > Descriptive Statistics > Explore and then check
Normality plots with tests to perform tests like Shapiro-Wilk and Kolmogorov-
Smirnov.
o Example: Testing whether the heights of a group of people follow a normal
distribution.
Excel:
1. Visualizing Normal Distribution:
o Data Entry: Enter your data into an Excel spreadsheet.
o Histogram: Select your data, go to Insert > Insert Statistic Chart > Histogram.
Adjust the bin width if necessary.
o Normal Curve: Use a scatter plot with a line (plot the normal distribution curve
using the NORM.DIST function).
o Example: Visualizing the distribution of daily sales figures.
2. Analyzing Normal Distribution:
o Descriptive Statistics: Use Data Analysis (available in the Data tab if the
Analysis ToolPak is installed) to get descriptive statistics.
o Normality Tests: Excel does not directly support normality tests, but you can use
add-ins or perform calculations manually.
o Example: Checking the distribution of customer satisfaction scores.
Applications of the Normal Distribution in Business
1. Quality Control:
o Process Improvement: Companies use the normal distribution to monitor
production processes and ensure they meet quality standards. Control charts are
based on the assumption of normality.
o Example: Monitoring the thickness of paper produced in a factory to ensure it
stays within specified limits.
2. Finance:
o Stock Returns: The returns on stocks and other financial assets are often
assumed to be normally distributed for risk assessment and portfolio
management.
o Example: Using the mean and standard deviation of historical returns to assess
the risk of an investment portfolio.
3. Marketing:
 o Customer Preferences: Analyzing normally distributed customer satisfaction
scores to improve products or services.
o Example: Surveying customers to determine the average satisfaction level and
targeting improvements to shift the mean satisfaction higher.
4. Human Resources:
o Performance Evaluation: Employee performance ratings can be analyzed using
the normal distribution to identify outstanding or underperforming employees.
o Example: Using performance appraisal scores to determine the average
performance and identify employees for rewards or further training.
5. Inventory Management:
o Demand Forecasting: Predicting future demand for products based on past
sales data assumed to follow a normal distribution.
o Example: A retail store uses past sales data to forecast future demand and
manage inventory levels.

Conclusion
Understanding the normal distribution and its properties is essential for statistical analysis and
interpretation. Using tools like SPSS and Excel, you can visualize and analyze probability
distributions effectively. The normal distribution has numerous applications in business, helping
organizations make data-driven decisions in quality control, finance, marketing, human
resources, and inventory management.

Applications of Normal Distribution in Real Estate

1. Property Price Analysis

• Market Trends: Analyzing historical property prices to understand market trends. If
property prices in a region follow a normal distribution, it can help in predicting future
prices.
• Example: Estimating the average home price in a neighborhood and understanding the
variability to set competitive prices.
2. Valuation and Appraisal
• Comparative Market Analysis (CMA): Real estate agents use normal distribution to
compare the prices of similar properties. This helps in setting a fair market value.
• Example: An appraiser might look at the distribution of prices for homes in a particular
area to determine the value of a new listing.
3. Risk Assessment
• Investment Risk: Investors analyze the returns on real estate investments assuming
they follow a normal distribution to assess risks and potential returns.
• Example: Using historical data on rental yields to evaluate the risk and return of
purchasing a rental property.
4. Market Segmentation
• Customer Preferences: Understanding the distribution of property features (like square
footage, number of bedrooms) to identify different market segments.
• Example: Analyzing the distribution of property sizes to determine which segments are
most popular and target marketing efforts accordingly.
Using SPSS and Excel
SPSS:
1. Visualizing Property Prices:
o Data Entry: Input property prices into SPSS.
o Histogram: Create histograms to visualize the distribution of property prices.
o Normal Curve: Add a normal curve to the histogram to see how well the prices fit
a normal distribution.
o Example: Plotting the selling prices of homes in a specific neighborhood to
understand the price distribution.
2. Analyzing Property Prices:
o Descriptive Statistics: Calculate mean, median, standard deviation, skewness,
and kurtosis of property prices.
o Normality Tests: Perform tests like Shapiro-Wilk to check if property prices follow
a normal distribution.
o Example: Analyzing the prices of commercial properties to determine the
average price and price variation.
Excel:
1. Visualizing Property Prices:
o Histogram: Use the Insert > Insert Statistic Chart > Histogram option to visualize
property prices.
o Normal Curve: Use a scatter plot with a line to plot the normal distribution curve
using the NORM.DIST function.
o Example: Visualizing the distribution of rental prices for apartments in a city.
2. Analyzing Property Prices:
o Descriptive Statistics: Use Data Analysis tool to get descriptive statistics for
property prices.
o Normality Tests: Use add-ins or manual calculations to test for normality.
o Example: Calculating the mean and standard deviation of residential property
prices to assess market conditions.

Significance in the Real Estate Industry

1. Pricing Strategy
• Setting Competitive Prices: Understanding the distribution of property prices helps set
competitive and realistic prices, aiding in quicker sales and better market positioning.
• Example: A real estate agent uses average and median prices to advise sellers on
pricing their homes competitively.
2. Investment Decisions
• Risk and Return Analysis: Investors use statistical analysis to assess the potential risks
and returns on property investments, helping in making informed decisions.
• Example: Analyzing historical rental yields to determine the expected return on
investment for a rental property.
3. Market Analysis
• Identifying Trends: Statistical analysis helps in identifying trends and patterns in the real
estate market, which can inform strategic decisions and marketing efforts.
• Example: Analyzing sales data to identify seasonal trends in property prices.
4. Appraisal Accuracy
 • Fair Market Value: Accurate property appraisals rely on understanding the distribution of
comparable property prices, ensuring fair market value assessments.
• Example: Appraisers use statistical tools to compare recent sales of similar properties to
appraise a new property.
5. Customer Insights
• Tailored Marketing: By understanding the distribution of property features and customer
preferences, real estate professionals can tailor their marketing strategies to target
specific segments effectively.
• Example: Identifying that most buyers are interested in homes with 3-4 bedrooms and
focusing marketing efforts on such properties.