11: Normal Random Variables &

Distributions
Continuous Probability Distributions
• A continuous random variable can assume any value in an interval on the real line
or in a collection of intervals.
• It is not possible to talk about the probability of the random variable assuming a
particular value.
• Instead, we talk about the probability of the random variable assuming a value
within a given interval.

11: Normal Random Variables & Distributions 2

Continuous Probability Distributions
• The probability of the random variable assuming a value within some given interval from
to is defined to be the area under the graph of the probability density function between
and .

Uniform f (x) Exponential

f (x)
Normal
f (x)

x
x x1 xx112 x22
x1 x2
x
x1 x2

11: Normal Random Variables & Distributions 3

Area as a Measure of Probability
• The area under the graph of and probability are identical.
• This is valid for all continuous random variables.
• The probability that x takes on a value between some lower value and some higher
value can be found by computing the area under the graph of over the interval from
to .

11: Normal Random Variables & Distributions 4

Normal Probability Distribution
• The normal probability distribution is the most important distribution for describing a
continuous random variable.
• It is widely used in statistical inference.
• It has been used in a wide variety of applications including:
 Heights of people
 Rainfall amounts
 Test scores
 Scientific measurements

11: Normal Random Variables & Distributions 5

Normal Probability Distribution
• Normal Probability Density Function
2
−(𝑥 −𝜇)
1
𝑓 (𝑥 )= 𝑒 2𝜎
𝜎 √2 𝜋
 where
 = mean
 = standard deviation
 = 3.14159
e = 2.71828

11: Normal Random Variables & Distributions 6

Normal Probability Distribution
• The distribution is symmetric; its skewness measure is zero.

11: Normal Random Variables & Distributions 7

Normal Probability Distribution
• The entire family of normal probability distributions is defined by its
mean and its standard deviation

Standard Deviation s

x
Mean m

11: Normal Random Variables & Distributions 8

Normal Probability Distribution
• The highest point on the normal curve is at the mean, which is also the
median.

11: Normal Random Variables & Distributions 9

Normal Probability Distribution
• The mean can be any numerical value: negative, zero, or positive.

x
-10 0 25

11: Normal Random Variables & Distributions 10

Normal Probability Distribution
• The standard deviation determines the width of the curve: larger values
result in wider, flatter curves

s = 15

s = 25

11: Normal Random Variables & Distributions 11

Normal Probability Distribution
• Probabilities for the normal random variable are given by areas under
the curve. The total area under the curve is 1 (.5 to the left of the mean
and.5 to the right).

.5 .5
x

11: Normal Random Variables & Distributions 12

Normal Probability Distribution
• Characteristics (basis for the empirical rule)
 68.26% of values of a normal random variable are within +/- 1 standard deviation of its mean.
 95.44% of values of a normal random variable are within +/- 2 standard deviation of its mean.
 99.72% of values of a normal random variable are within +/- 3 standard deviation of its mean.

11: Normal Random Variables & Distributions 13

Normal Probability Distribution
99.72%
95.44%
68.26%

m x
m – 3s m – 1s m + 1s m + 3s
m – 2s m + 2s

11: Normal Random Variables & Distributions 14

Standard Normal Probability Distribution
• A random variable having a normal distribution with a mean of 0 and a
standard deviation of 1 is said to have a standard normal probability
distribution.

11: Normal Random Variables & Distributions 15

Standard Normal Probability Distribution
• The letter is used to designate the standard normal random variable.

s=1

z
0

11: Normal Random Variables & Distributions 16

Standard Normal Probability Distribution
• Converting to the Standard Normal Distribution

𝑥 −𝜇
𝑧=
𝜎

 We can think of as a measure of the number of standard deviations is from .

11: Normal Random Variables & Distributions 17

Standardizing
Examples
• The heights of women aged 20 to 29 in the United States are approximately Normal with µ = 64.2 and
σ = 2.8 inches. The standardized height is
 z = (height − 64.2)/2.8
• A woman's standardized height is the number of standard deviations by which her height differs from
the mean height of all women aged 20 to 29. A woman 70 inches tall, for example, has standardized
height
 z = (70 − 64.2)/2.8 = 2.07
 or 2.07 standard deviations above the mean.
• Similarly, a woman 5 feet (60 inches) tall has standardized height
 z = (60 − 64.2)/2.8 = −1.50
 or 1.5 standard deviations less than the mean height.

11: Normal Random Variables & Distributions 18

Standard Normal Curve
Cumulative Proportions
• The cumulative proportion for a value z in a standard normal distribution is the proportion of
observations in the distribution that are less than or equal to z.

Proportion of
observations < 0.81:

11: Normal Random Variables & Distributions 19

The Standard Normal Table
• Because all Normal distributions are the same when we standardize, we can find areas
under any Normal curve from a single table.
The Standard Normal Table
• The Standard Normal table is a table of areas under the standard Normal curve. The
table entry for each value z is the area under the curve to the left of z.

Suppose we want to find the proportion of

observations from the standard Normal distribution
that are less than 0.81. P(z < 0.81) =.7910
We can use the table:
Z .00 .01 .02
0.7 .7580 .7611 .7642
0.8 .7881 .7910 .7939
0.9 .8159 .8186 .8212

11: Normal Random Variables & Distributions 20

Normal Calculations
Example
Find the proportion of observations from the standard Normal distribution
that are between –1.25 and 0.81.

11: Normal Random Variables & Distributions 21

Normal Calculation Steps
Using the Standard Normal table to find Normal proportions
• Step 1. State the problem in terms of the observed variable x. Draw a picture that
shows the proportion you want in terms of cumulative proportions.
• Step 2. Standardize x to restate the problem in terms of a standard Normal variable
z.
• Step 3. Use Table A and the fact that the total area under the curve is 1 to find the
required area under the standard Normal curve.

11: Normal Random Variables & Distributions 22

Finding a Value Given a Proportion
• SAT reading scores for a recent year are distributed according to a N(504, 111)
distribution.
• How high must a student score in order to be in the top 10% of the distribution?
• In order to use the table, equivalently, what score has cumulative proportion 0.90 below
it?
Area = 0.90 Area = 0.10

𝒛=? z
11: Normal Random Variables & Distributions 23
Finding a Value Given a Proportion

How high must a student score in order to be

in the top 10% of the distribution?

Look up the closest probability (closest to

0.10) in the table. P(Z<?)=0.9
z .07 .08 .09
Find the corresponding z- score.
1.1 .8790 .8810 .8830

1.2 .8980 .8997 .8015

1.3 .8147 .8162 .8177

z = 1.28
11: Normal Random Variables & Distributions 24
Finding a Value Given a Proportion
How high must a student score in order to be in the top 10% of the distribution?

z = 1.28
We need to “unstandardize” the z-score to find the observed value (x):

x
z x    z

x = 504 + z(111)
= 504 + [(1.28 )  (111)]
= 504 + (142.08) = 646.08
A student would have to score at least 646.08 to be in the top 10% of the distribution of SAT reading
scores for this particular year.

11: Normal Random Variables & Distributions 25

Steps for “Backward” Normal Calculations
• Step 1. State the problem in terms of the given proportion. Draw a picture that
shows the Normal value, x, you want in relation to the cumulative proportion.
• Step 2. Use Table A, the fact that the total area under the curve is 1, and the given
area under the standard Normal curve to find the corresponding z-value.
• Step 3. Unstandardize z to solve the problem in terms of a non-standard Normal
variable x.

11: Normal Random Variables & Distributions 26

Standard Normal Probability Distribution
Example: Pep Zone
• Pep Zone sells auto parts and supplies including a popular multi-grade
motor oil. When the stock of this oil drops to 20 gallons, a
replenishment order is placed.
• The store manager is concerned that sales are being lost due to
stockouts while waiting for a replenishment order.

11: Normal Random Variables & Distributions 27

Standard Normal Probability Distribution
Example: Pep Zone

• It has been determined that demand during replenishment lead-time is normally

distributed with a mean of 15 gallons and a standard deviation of 6 gallons.
• The manager would like to know the probability of a stockout during replenishment
lead-time. In other words, what is the probability that demand during lead-time will
exceed 20 gallons?

P(x > 20) = ?

11: Normal Random Variables & Distributions 28

Standard Normal Probability Distribution
Example: Pep Zone
• Step 1: Convert to the standard normal distribution
z = (x - )/
= (20 - 15)/6
= .83

• Step 2: Find the area under the standard normal curve to the left of . (details next
slide)

11: Normal Random Variables & Distributions 29

Standard Normal Probability Distribution
Example: Pep Zone
• Cumulative Probability Table for the Standard Normal Distribution

z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
. . . . . . . . . . .

P(z < .83)

11: Normal Random Variables & Distributions 30
Standard Normal Probability Distribution
Example: Pep Zone
• Solving for the Stockout Probability
• Step 3: Compute the area under the standard normal curve to the right
of z = .83.
P(z > .83) = 1 – P(z < .83)
= 1- .7967
= .2033

Probability
of a stockout P(x > 20)

11: Normal Random Variables & Distributions 31

Standard Normal Probability Distribution
Solving for the Stockout Probability

Area = 1 - .7967
Area = .7967
= .2033

z
0 .83
11: Normal Random Variables & Distributions 32
Standard Normal Probability Distribution
Example: Pep Zone
• If the manager of Pep Zone wants the probability of a stockout during
replenishment lead-time to be no more than .05, what should the
reorder point be?
 Hint: Given a probability, we can use the standard normal table in an inverse
fashion to find the corresponding z value.

11: Normal Random Variables & Distributions 33

Standard Normal Probability Distribution
Solving for the Reorder Point
• Step 1: Find the z-value that cuts off an area of .05 in the right tail of
the standard normal distribution.

We look up
the complement
of the tail area
(1 - .05 = .95)

11: Normal Random Variables & Distributions 34

Standard Normal Probability Distribution
Solving for the Reorder Point
• Step 2: Convert z.05 to the corresponding value of x.
x =  + z.05
 = 15 + 1.645(6)
= 24.87 or 25

• A reorder point of 25 gallons will place the probability of a stockout during leadtime
at (slightly less than) .05.

11: Normal Random Variables & Distributions 35

Normal Probability Distribution
Solving for the Reorder Point
Probability of no
Probability of a
stockout during
stockout during
replenishment
replenishment
lead-time = .95
lead-time = .05

x
15 24.87

11: Normal Random Variables & Distributions 36

Standard Normal Probability Distribution
Solving for the Reorder Point
• By raising the reorder point from 20 gallons to 25 gallons on hand, the probability of
a stockout decreases from about .20 to .05.
• This is a significant decrease in the chance that Pep Zone will be out of stock and
unable to meet a customer’s desire to make a purchase.

11: Normal Random Variables & Distributions 37

Practice Problem 1
The mean cost of domestic airfares in the US rose to an all-time high of $385 per ticket. Airfares were
bases on the total ticket value, which consisted of the price charged by the airlines plus any additional
taxes and fees. Assume domestic airfares are normally distributed with a standard deviation of $110.

a) What is the

b) What is the probability that a domestic airfare is $250 of less?

11: Normal Random Variables & Distributions 38

Practice Problem 1
c) What is the probability that a domestic airfare is between $300 and $500?
 For x=500,
 For x=300,

d) What is the cost for the 3% highest domestic airfares?

 The upper 3%, or occurs for

 For an airfare to be in the upper 3%, it must be $592 or more

11: Normal Random Variables & Distributions 39

Practice Problem 2
The average return for large-cap domestic stock funds over the three years 2009-2011 was 14.4%.
Assume the three year returns were normally distributed with a standard deviation of 4.4%

a) What is the probability an individual large-cap domestic stock fund has a three-year return of at least
20%?
 For x=20,

b) What is the probability an individual large-cap domestic stock fund has a three-year return of 10% or
less?
 For x=10,

11: Normal Random Variables & Distributions 40

Practice Problem 2
c) How big does the return have to be to put a domestic stock fund in the top 10% for
the three-year period?
 The approximate upper 10%, or occurs for

 A return of 20.03% or higher will put a domestic stock fund in the top 10%

11: Normal Random Variables & Distributions 41

Practice Problems

• Practice Problem Set #8

11: Normal Random Variables & Distributions 42