Course Title: Business St at ist ic s I

Tutorial # 5

Discrete Distributions

Exercise #1

You are trying to develop a strategy for investing in two different stocks. The anticipated annual
return for a $1,000 investment in each stock under four different economic conditions has the
following probability distribution:

Compute the
1. expected return for stock X and for stock Y.
2. standard deviation for stock X and for stock Y.
3. covariance of stock X and stock Y.
4. Would you invest in stock X or stock Y? Explain.
5. You want to create a portfolio that consists of stock X and stock Y. Compute the portfolio expected
return and portfolio risk for each of the following percentages invested in stock X: a. 30%
b. 50%
c. which portfolio would you recommend? Explain.

Exercise #2

The following table provides a breakdown of advertising sales representatives of a population according
to the number of items sold per day

Number of items sold 0 1 2 3 4

Number of representatives 488 1872 884 186 18

1. Determine the Probability distribution function.

2. Determine the Cumulative distribution function (CDF).
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 3. What is the probability that an advertising sales representative sold more than 2 items?
4. What is the probability that an advertising sales representative sold less than 3 items?
5. Calculate and interpret the expected value. 6. Calculate the variance and the standard
deviation.

Exercise #3

The following table provides laptop sales for 30 days

Laptops sold days

0 5
1 10
2 6
3 4
4 5
1. Determine the Probability mass function (pmf).
2. Determine the Cumulative distribution function (CDF).
3. What is the probability that in five days, no laptop is sold?
4. What is the probability of selling at least 3 laptops?
5. Calculate and interpret the expected value.
6. Calculate the variance and the standard deviation.

Exercise #4

In a school, 60% of students have access to the internet at home. A group of 8 students is chosen
at random.
1. Define the probability distribution function
2. Find the probability that exactly 5 have access to the internet.
2. Find the probability that at least 6 students have access to the internet.
3. Compute the mean and the variance

Exercise #5

Consider that the buying behavior for the next three customers in a clothing store is independent.
The store manager estimates the customer buy-up probability to 0.3.
1. Determine the probability distribution function
2. What is the probability that no customer makes a purchase?
3. What is the probability that two customers make a purchase?
4. Calculate the mean and variance

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Exercise #6

Candidates for a TV game show have to answer ten questions in order to be selected. They must
choose for each question, the right statement out of four. X is
the random variable denoting the number of correct answers given by the candidate at the end of
the questionnaire.
1. What is the probability distribution function of X?
2. Compute the mean and the variance
3. Calculate the probability that the candidate provides at least 8 correct answers, and thus be selected.

Exercise #7

An airlines reservations office receives an average of 0.7 requests per minute.

What is the probability that between 1:59 pm and 2 pm, it receives: a. no requests
b. one request
c. more than one request.

Exercise #8

A pen company averages 1.2 defective pens per carton produced (200 pens). The number of defects per
carton is Poisson distributed.
a. What is the probability of selecting a carton and finding no defective pens?
b. What is the probability of finding eight or more defective pens in a carton?
c. Suppose a purchaser of these pens will quit buying from the company if a carton contains more than
three defective pens. What is the probability that a carton contains more than three defective pens?

Exercise #9

Catalog Age lists the top 17 U.S. firms in annual catalog sales. Dell Computer is number one
followed by IBM and W.W. Grainger. Of the 17 firms on the list, 8 are in some type of computer-
related business. Suppose four firms are randomly selected.
a. What is the probability that none of the firms is in some type of computer-related business?
b. What is the probability that all four firms are in some type of computer-related business?
c. What is the probability that exactly two are in non-computer-related business?

Exercise #10

Suppose three positions are open in a company for which eight men and seven women have
applied for. Assuming each applicant is equally qualified for either position, what is the
probability that three men were selected for the position?

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 Exercise #11

Between 1896 when the Dow Jones Index was created and 2009, the index rose in 64% of the years (data
extracted from M. Hulbert, “What the Past Can’t Tell Investors,” The NewYork Times, January 3, 2010,
p. BU2). Based on this information, and assuming a binomial distribution, what do you think is the
probability that the stock market will rise a. next year?
b. the year after next?
c. in four of the next five years?
d. in none of the next five years?
e. For this situation, what assumption of the binomial distribution might not be valid?

Exercise #12
One theory concerning the Dow Jones Industrial Average is that it is likely to increase during U.S.
presidential election years. From 1964 through 2008, the Dow Jones Industrial Average increased in 9
of the 12 U.S. presidential election years. Assuming that this indicator is a random event with no
predictive value, you would expect that the indicator would be correct 50% of the time.

a. What is the probability of the Dow Jones Industrial Average increasing in 9 or more of the 12
U.S. presidential election years if the probability of an increase in the Dow Jones Industrial
Average is 0.50?

b. What is the probability that the Dow Jones Industrial Average will increase in 9 or more of the
12 U.S. presidential election years if the probability of an increase in the Dow Jones Industrial
Average in any year is 0.75?