Chapter 6

6. Random Variable and Probability Distribution

6.1. Random variable
Random variable is numerical valued function defined on the sample space. It assigns a real number for
each element of the sample space. Generally random variables are denoted by capital letters and the values
of the random variables are denoted by small letters.
There two types of random variables: Discrete and Continuous random variable.
Discrete random variable: are variables which can assume only a specific number of values. They have
values that can be counted.
Examples:
• number of customers in restaurant per day
• Number of car accidents per week.
• Number of defective items in a given company.
• Number of consumers for sales.
Continuous random variable: are variables that can assume all values between any two give values or
intervals.
Examples
• Time between customer arrivals in minutes
• Height of students at certain college.
• Life time of light bulbs.
Probability distribution: - consists of a value a random variable can assume and the corresponding
probabilities of the values or it is a function that assigns probability for each element of random variable.
Probability distribution can be discrete or continuous.
1. Discrete probability distribution: - is a formula, a table, a graph or other devices used to specify all
possible values of the discrete random variable (R.V) X along with their respective probabilities. Properties
of discrete probability distribution
2. Continuous probability distribution

Definition: let X be a continuous random variable with a non-negative function f(x) called probability
density function (Pdf). Then f(x) satisfies the following legitimates:
1.
∞
2. ∫−∞ 𝑓(𝑥)𝑑𝑥 = 1, i.e. total area under the normal cure equals to one.
Example: Suppose that the r-v X is continuous with the following pdf:
2x , if 0 < x < 1
𝑓(𝑥) = { .
0 , otherwise
a) Verify that it is valid density
b) Evaluate P(X<0.5) and P(0.8<X<1.2)

6.2. Introduction to expectations

Definition:
1. Let X be a random variable with probability distribution 𝑃(𝑥) 𝑜𝑟 𝑓(𝑥). The mean, or
expected value, of X is
𝜇 = 𝐸(𝑋) = ∑ 𝑥𝑃(𝑥) , 𝑖𝑓 𝑋 𝑖𝑠 𝑑𝑖𝑠𝑐𝑟𝑒𝑡𝑒, 𝑎𝑛𝑑
𝑎𝑙𝑙 𝑥
∞
𝜇 = 𝐸(𝑋) = ∫−∞ 𝑥𝑓(𝑥)𝑑𝑥, 𝑖𝑓 𝑋 𝑖𝑠 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑜𝑢𝑠.

2. Let X be a random variable with probability distribution f(x) and mean μ. The
variance of X is

𝜎2 = 𝐸[(𝑋 − 𝜇)2 ] = ∑(𝑥 − 𝜇)2 𝑃(𝑥) , 𝑖𝑓 𝑋 𝑖𝑠 𝑑𝑖𝑠𝑐𝑟𝑒𝑡𝑒, 𝑎𝑛𝑑

𝑥
 ∞

𝜎2 = 𝐸[(𝑋 − 𝜇)2 ] = ∫ (𝑥 − 𝜇)2 𝑓(𝑥) 𝑑𝑥, 𝑖𝑓 𝑋 𝑖𝑠 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑜𝑢𝑠.

−∞
The positive square root of the variance, σ, is called the standard deviation of X.

Example 1: Using historical records, the personnel manager of a plant has determined the probability
distribution of X, the number of employees absent per day. It is
X 0 1 2 3 4 5 6 7
P(x) 0.005 0.025 0.31 0.34 0.22 0.08 0.019 0.001
Find the following:
A.
B.
C.
D. The expected number of employees absent per day.
E. Variance.
Solution: - Since the variable X is discrete,
A.
. This is the probability that the number of employees absent per day
will be between 2 and 5 employee including end points.

B.
C. P(X<4)=P(X=0)+ P(X=1)+ P(X=2)+ P(X=3)=0.005+0.025+0.31+0.34=0.68
D.
E. In order to compute Var(X) 𝐸(𝑋 2 ), 𝑎𝑛𝑑 𝜇 should be determined. By definition:
∑𝑥 𝑥 2 𝑃(𝑥) 𝑖𝑠 𝐸(𝑋 2 ) 𝑎𝑛𝑑 ∑𝑥 𝑥(𝑃(𝑥)) 𝑖𝑠 𝜇
𝐸(𝑋 2 ) = ∑𝑥 𝑥 2 (𝑃(𝑥)) = 0(0.005) + 1(0.025) + 4(0.31) + 9(0.34) + 16(0.22) + 25(0.08 +
36(0.018) + 49(0.001)) =10.6 and 𝜇 = 3
Thus 𝐸(𝑋 2 ) − 𝜇 2 = 10.6 − 32 = 10.6 − 9 = 1.6
Example 2: The weekly demand for a drinking-water product, in thousands of liters, from a local chain of
efficiency stores is a continuous random variable X having the probability density
2(𝑥 − 1) , 1 < 𝑥 < 2
𝑓(𝑥) = {
0, 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒
Find the mean and variance of X.
Solution
2 2
2 2 5
𝜇 = 𝐸(𝑋) = ∫ 𝑥(2(𝑥 − 1)) 𝑑𝑥 = 2 ∫(𝑥 2 − 𝑥)𝑑𝑥 = ( 𝑥 3 − 𝑥 2 ) | =
3 1 3
1 1
2 2
1 2 2 17
𝐸(𝑋 2 ) = ∫ 𝑥 2 (2(𝑥 − 1)) 𝑑𝑥 = 2 ∫(𝑥 3 − 𝑥 2 )𝑑𝑥 = ( 𝑥 3 − 𝑥 3 ) | =
2 3 1 6
1 1
17 5 17 25 1
Then 𝐸(𝑋 2 ) − 𝜇 2 = − (3)2 = − = 18
6 6 9

Properties of expected value and variance of random variables

❖ 𝐸(𝑐) = 𝑐 for any constant c
❖ 𝑉𝑎𝑟(𝑐) = 0 for any constant c
❖ 𝐸(𝑎𝑋 ± 𝑏) = 𝑎𝐸(𝑋) ± 𝑏 for constants a and b
❖ 𝑉𝑎𝑟(𝑎𝑋 ± 𝑏)=𝑎2 𝑉𝑎𝑟(𝑋) for any constants a and b
❖ 𝑉𝑎𝑟(𝑋 ± 𝑌) = 𝑉𝑎𝑟(𝑋) + 𝑉𝑎𝑟(𝑌) ± 2𝐶𝑜𝑣(𝑋, 𝑌)
❖ 𝐸(𝑋 ± 𝑌) = 𝐸(𝑋) ± 𝐸(𝑌)
Note if X and Y are independent random variables, then 𝐸(𝑋𝑌) = 𝐸(𝑋)𝐸(𝑌) but not the converse holds
true
6.3. Common Discrete Probability Distributions
In this section, we shall study two common discrete probability distributions, namely, the Binomial and
Poisson distributions.
i. Binomial Distribution: A binomial experiment is a probability experiment that satisfies the
following four requirements called assumptions of a binomial distribution.
1. The experiment consists of n identical trials.
2. Each trial has only one of the two possible mutually exclusive outcomes, success or a failure.
3. The probability of each outcome does not change from trial to trial, and
4. The trials are independent, thus we must sample with replacement.
Examples of binomial experiments
• Tossing a coin 20 times to see how many tails occur.
• Asking 200 people if they watch BBC news.
• Registering a newly produced product as defective or non-defective.
• Asking 100 people if they favor the ruling party.
• Rolling a die to see if a 5 appears.
Definition: The outcomes of the binomial experiment and the corresponding probabilities of these outcomes
are called Binomial Distribution.
Let p=probability of success q= 1-p=probability of failure on any given trials Then
the probability getting x success in n trials becomes

And this sometimes written as

X ~ Bin(n, p)

When using the binomial formula to solve problems, we have to identify three things:
• The number of trials (n)
• The probability of a success on any one trial (P) and
• The number of successes desired (X).
Remark: If X is a binomial random variable with parameters n and p then
and
Example: If the probability is 0.20 that people traveling on Ethiopian airline flight will a business man, find
the probability that 3 of 10 people on such flight will be a Business man?
Solution: Let X be the number of vegetarians. Given n = 10, p = 0.20, X = 3; then,

Exercise:
1. Suppose that an examination consists of six true and false questions, and assume that a student has
no knowledge of the subject matter. The probability that the student will guess the correct answer to the
first question is 30%. Likewise, the probability of guessing each of the remaining questions correctly is
also 30%.
a. What is the probability of getting more than three correct answers?
b. What is the probability of getting at least two correct answers?
c. What is the probability of getting at most three correct answers?
d. What is the probability of getting less than five correct answers?
 2. According to the last census, 45% of working women held full-time jobs in 2010. If a random sample
of 50 working women is drawn, what is the probability that 2 or more hold full-time jobs?

ii. Poisson distribution

Another useful discrete probability distribution is the Poisson distribution, named after its French creator.
Like the binomial random variable, the Poisson random variable is the number of occurrences of events,
which we‘ll continue to call successes. The difference between the two random variables is that a binomial
random variable is the number of successes in a set number of trials, whereas a Poisson random variable is
the number of successes in an interval of time or specific region of space. It is used as a distribution of rare
events, such as:
• Natural disasters like earth quake.
• Accidents. The number of accidents in 1 day on a particular stretch of highway.
• Arrivals. The number of costumers arriving at a service station in 1 hour.
• Number of misprints pages.
• Number of claims per day in an insurance company
A random variable X is said to have a Poisson distribution if its probability distribution is given by:

Where: λ is the average number occurrence of an event in the unit length of interval or distance and x is the
number of occurrence in a Poisson process.
The Poisson distribution depends only on the average number of occurrences per unit time of space.
The process that gives rise to such events is called Poisson process.
Note: - If X is a Poisson random variable with parameters λ then E(x) = λ and var(x) = λ.
Example:
1. Suppose that customers enter a waiting line at random at a rate of 4 per minute. Assuming that the number
entering the line during a given time interval has a Poisson distribution, find the probability that:
a) One customer enters during a given one-minute interval of time;
b) At least one customer enters during a given half-minute time interval.
Solution:
𝑒 −4 41
a) Given λ=4 per min, 𝑃(𝑋 = 1) = = 4𝑒 −4 = 0.0733
1!
b) Per half-minute, the expected number of customers is 2, which is a new parameter.
Exercise
1. The number of bank robberies that occur in a large city is Poisson distributed with a mean of 2 per day.
Find the probabilities of the following events.
A. Three or more bank robberies in a day
B. Between 10 and 15 (inclusive) robberies during a 5-day period
2. A bank manager wants to provide prompt service for customers at the bank drive up window.
The average number arrival rate is 7 customers per 15 minutes period. Assuming that X has a Poisson
distribution, find the probability that 10 customers will arrive in a particular 15 minutes period?
3. The number of users of an automatic banking machine is Poisson distributed. The mean number of
users per 5-minute interval is 1.5. Find the probability of the following events.
A. No users in the next 5 minutes
B. Five or fewer users in the next 15 minutes
C. Three or more users in the next 10 minutes

6.4. Common Continuous Probability Distributions

Normal Distribution: A random variable X is said to have a normal distribution if its probability density
function is given by

.
Properties of Normal Distribution:
1. It is bell shaped and is symmetrical about its mean
2. It is asymptotic to the axis, i.e., it extends indefinitely in either direction from the mean.
3. It is completely described by two parameters: mean and standard deviation.
4. Total area under the curve sums to 1, i.e., the area of the distribution on each side of the mean
is 0.5

5. It is uni-modal, i.e., values mound up only in the center of the curve.

6. Median=Mean=mode =μ and located at the center of the distribution.
7. The probability that a random variable will have a value between any two points is equal to
the area under the curve between those points.
➢ To calculate the probability that a normal random variable falls into any interval, we must
compute the area in the interval under the curve. Unfortunately, the function is not as simple
as the uniform precluding the use of simple mathematics or even integral calculus. Instead we
will resort to using a probability tables through standardization i.e. using standard normal
distribution table.
Note: The following distribution known as the standard normal distribution was derived by using
the

.
Properties of the Standard Normal Distribution: Same as a normal distribution, but
• Mean is zero
• Variance and Standard Deviation is one
➢ Areas under the standard normal distribution curve have been tabulated in various ways.
The most common ones are the areas between Z=0 and a positive value of Z.

a) Let Z0 be negative number, then

8
 .

ii) If Z0 is positive real number, then

iii) Let Z0 be negative number, then

i. If Z0 is positive real number, then

ii. Let Z1 be a negative number and Z2 be positive real number, then

Example: Calculate probability using Z-table.

1. Find the probabilities that a r-v having the standard normal distribution will take on a value
a) Less than 1.72 c) Between 1.30 & 1.75
b) less than -0.88 d) Between -0.25 & 0.45.

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 Solution: Making use of the Z table, we find that
a) P (Z<1.72)=P(Z<0)+P(0<Z<1.72)=0.5+0.4573=0.9573.
b) P (Z < -0.88) = P(Z > 0.88) =0.5 - P(0 < Z < 0.88) =0.5- 0.3106 = 0.1894.
c) P (1.30 < Z <1.75)= P(0 < Z < 1.75) – P(0 < Z < 1.30) = 0.4599 – 0.4032)=0.0567.

d) P (-0.25 < Z < 0.45)= P(-0.25 < Z < 0) + P( 0 < Z < 0.45) = 0.0987 + 0.1736=0.2723.
2. Consider an investment whose return is normally distributed with a mean of 10% and a
standard deviation of 5%.
a. Determine the probability of losing money.
b. Find the probability of losing money when the standard deviation is equal to 10%.
Solution:
a) The investment loses money when the return is negative.
Thus, we wish to determine
The first step is to standardize both X and 0 in the probability statement:

Therefore, the probability of losing money is .0228.

b)
As you can see, increasing the standard deviation increases the probability of losing money. Note
that increasing the standard deviation will also increase the probability that the return will exceed
some relatively large amount. However, because investors tend to be risk averse, we emphasize
the increased probability of negative returns when discussing the effect of increasing the standard
deviation.
Exercise : Find the following:
1. Let Z be the standard normal random variable. Calculate the following probabilities using
the standard normal distribution table:
a) P(0<Z<1.2) e) P (Z 0)
b) P (Z<-1.43) f) P (Z>1.52)
c) P (0<Z<1.43) g) P (-1.2<Z<0)
d) P (-1.43<Z<1.2) h) P (Z<-1.52)

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2. The weekly incomes of a large group of middle managers are normally distributed with
a mean of 1000 birr and standard deviation of 100 birr, and then find the probability
that the income of managers will be
A. Less than 1100 birr? B. Between 900 birr and 1250 birr?
3. Under the system of floating exchange rates, the rate of foreign money to the U.S. dollar
is affected by many random factors, and this leads to the assumption of a normal
distribution of small daily fluctuations. The rate of U.S. dollar per euro is believed in
April 2016 to have a mean of 1.36 and a standard deviation of 0.03.
a) Find the probability that tomorrow‘s rate will be above 1.42.
b) Find the probability that tomorrow‘s rate will be below 1.35.
4. Because of the relatively high interest rates, most consumers attempt to pay off their
credit card bills promptly. However, this is not always possible. An analysis of the
amount of interest paid monthly by a bank‘s Visa cardholders reveals that the amount
is normally distributed with a mean of $27 and a standard deviation of $7.
a) What proportion of the bank‘s Visa cardholder pay more than $30 in interest?
b) What proportion of the bank‘s Visa cardholder pay more than $40 in interest?
c) What proportion of the bank‘s Visa cardholder pay less than $15 in interest?
d) What interest payment is exceeded by only 20% of the bank‘s Visa cardholders?

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Statistical Z-Score Table

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