5

Discrete Probability
Distributions
Business Statistics:
Communicating with Numbers, 4e

By Sanjiv Jaggia and Alison Kelly

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
2/19/23 consent of McGraw Hill.
5-1
Chapter 5 Learning Objectives (LOs)
LO 5.1 Describe a discrete random variable and its
probability distribution.
LO 5.2 Calculate and interpret summary measures
for a discrete random variable.
LO 5.3 Calculate and interpret summary measures
to evaluate portfolio returns.
LO 5.4 Calculate and interpret probabilities for a
binomial random variable.
LO 5.5 Calculate and interpret probabilities for a
Poisson random variable.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written5-2
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 Introductory Case: Available Staff for
Probable Customers
• Anne Jones is a manager of a local Starbucks.
– Starbucks announced plans in 2008 to close 500 U.S. locations.
– While Anne’s store will remain open, she is concerned that nearby
closings might affect her business.
– Anne needs to decide staffing needs.
– Too many employees would be costly to the store.
– Not enough employees could result in losing customers who
choose not to wait.
• With an understanding of the probability distribution of
customer arrivals, Anne will be able to:
1. Calculate the expected number of visits from a typical Starbucks
customer in a given time period.
2. Calculate the probability that a typical customer visits the store a
specific number of times in a given time period.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written5-3
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 Discrete Probability Distributions
• A random variable summarizes the results of
an experiment in terms of numerical values.
• Classified into
– Discrete random variables – distinct values
– Ex: No. of sales-persons who hit the target, no.
of students lined up for PA, no. of cars lined up at
a toll booth.
– Stat tools: mean, variance, standard deviation
– Continuous random variables – uncountable
values within an interval
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written5-4
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.1 Random Variables and Discrete
Probability Distributions
• A random variable provides a means for describing
outcomes of an experiment using numerical values.
– Captures uncertainty
– Summarizes outcomes of an experiment with numerical values
• A discrete random variable assumes a countable number
of distinct values such as 0,1,2,3,4….
– Use the letter X to denote a random variable
– Distinct values are represented by 𝑥! , 𝑥" , ⋯ , 𝑥#
– Example: number of employees, number of salespeople
• A continuous random variable is characterized by an
uncountable values in an interval.
– Cannot describe or summarize with a list
– Example: return on a mutual fund
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written5-5
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
PROBABILITY – DISCRETE VARIABLES
Example:
• Experiment : Flipping a coin 4 times
• Event: getting tails
• Solutions: S = (HHHH, HTHH, HHTH,… TTTT)
• = 16 possible outcomes
Discrete variable of getting tails, X= (0,1,2,3,4)
• P(X=0) = 1/16
• P(X=1) = 4/16
• P(X=2)= 6/16
• P(X=3) = 4/16
• P(X=4)= 16/16

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written5-6
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
Example 2: Find the probability if getting at MOST 2 tails
when you flip a coin 4 times using the probability model
below:
# of tails 0 1 2 3 4
Probability 1/16 4/16 6/16 4/16 1/16

Probability of getting at most 2 tails:

P(X ≤ 2) = P(X=0) + P(X=1)+ P(X=2)
= 1/16 + 4/16 + 6/16
= 11/16 = 0.6875
Therefore ,the probability of getting at most 2 tails when
you flip a coin 4 times is 68.75%

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written5-7
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
5.1 The Discrete Probability Distribution
• Every discrete random variable is associated with a
probability distribution.
– Called a probability mass function
– Provides the probability that a random variable X
assumes a particular value x, 𝑷(𝑿 = 𝒙)
• Two key properties
1. The probability of each value of x is a value between 0 and 1
𝟎 ≤ 𝑷(𝑿 = 𝒙) ≤ 𝟏
1. The sum of the probabilities equals 1, or ∑ 𝑷 𝑿 = 𝒙 = 𝟏
• A discrete random variable can also be defined in
terms of the cumulative distribution function,
𝑷 𝑿≤𝒙 .
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written5-8
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
5.1 The Discrete Probability Distribution
• Discrete probability can be viewed in several ways (tabular,
algebraic, graphical form)
• Example: Roll a six-sided die & define the number of rolled
as the random variable.
– Finite number of values
– Each value is equally likely
– Symmetric distribution
– Probability mass function: P(X=5) = 0.1667
Probability
Distribution

Cumulative
Probability
Distribution
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written5-9
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
• Using Cumulative Probability Distribution
• P(X ≤ 4) = 4/6 = 0.6667
• To find specific value, say P(X=3) can be
found as P(X ≤ 3) - P(X ≤ 2) = 0.5000 –
0.3333 = 0.1667
• P(X=5) = P(X ≤ 5) - P(X ≤ 4) = 0.8333-
0.6667 = 0.1667

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-10
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
5.1 The Discrete Probability Distribution
• Example continued – Graphical and algebraic

!⁄ 𝑖𝑓 𝑥 = 1,2,3,4,5,6
𝑃 𝑋=𝑥 = + " thus P(X=5) =0.0167 and
0 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒
P(X=7) = 0

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-11
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
5.1 The Discrete Probability Distribution
• Example: the number of houses a realtor sells in a month.

a. Is this a valid probability distribution?

b. What is the probability that the realtor does not sell any houses?
c. What is the probability that the realtor sells at most one house?
d. What is the probability that the realtor sells at least two houses?
e. Graphically depict the probability distribution.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-12
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
5.1 The Discrete Probability Distribution
• Example continued

a. Is this a valid probability distribution?

Yes, because 0 < P(X = x) < 1and SP(X = x) = 1

b. What is the probability that the realtor does not

sell any houses?
P(X = 0) = 0.30
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-13
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
5.1 The Discrete Probability Distribution

c. What is the probability that the realtor sells at most one house?
P(X ≤ 1) = P(X = 0) + P(X = 1) = 0.30 + 0.50 = 0.80

d. What is the probability that the realtor sells at least two houses?
P(X > 2) = P(X = 2) + P(X = 3) = 0.15 + 0.05 = 0.20

Alternatively, P(X > 2) = 1 − P(X ≤ 1) = 1 − 0.80 = 0.20.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-14
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.1 Random Variables and Discrete
Probability Distributions (7)
• Example continued
e. Graphically depict the probability distribution

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-15
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 Solve Exercises 5.1

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-16
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
 BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-20
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
5.2 Expected Value, Variance, and Standard Deviation
SUMMARY MEASURES
• The expected value is also referred to as the mean.
– It is a weighted average of all possible values of X
– Denoted as 𝐸(𝑋) or 𝜇, indicates central location
– It is calculated as 𝐸 𝑋 = 𝜇 = ∑ 𝑥# 𝑃 𝑋 = 𝑥#
• The variance and standard deviation are both
measures of variability.
– The variance is denoted 𝑉𝑎𝑟 𝑋 or 𝜎 $
– The variance is calculated as
𝑽𝒂𝒓(𝑿) = 𝝈𝟐 = ∑ 𝒙𝒊 − 𝝁 𝟐 𝑷 𝑿 = 𝒙𝒊
– The standard deviation is denoted by 𝑆𝐷(𝑋) or 𝜎
– Indicates if values are clustered about the mean or
widely scattered
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-23
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
5.2 Expected Value, Variance, and Standard Deviation
SUMMARY MEASURES
• Example: Brad Williams is the owner of a large car dealership in
Chicago. Brad decides to construct an incentive compensation
program that equitably and consistently compensates employees
on the basis of their performance.

a. Calculate the expected value of the annual bonus amount.

b. Calculate the variance and the standard deviation of the annual
bonus amount.
c. What is the total annual amount that Brad can expect to pay in
bonuses if he has 25 employees?

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-24
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
5.2 Expected Value, Variance, and Standard Deviation
SUMMARY MEASURES
a. Calculate the expected value of the annual bonus amount
• Let the random variable X denote the bonus amount (in $1,000’s).

The expected value is 𝐸 𝑋 = 𝜇 = ∑ 𝑥! 𝑃 𝑋 = 𝑥! = 4.2 or $4,200.

b. Calculate the variance and the standard deviation of the annual bonus amount.
The variance is 𝑉𝑎𝑟 𝑋 = 𝜎 " = ∑ 𝑥! − 𝜇 " 𝑃 𝑋 = 𝑥! = 9.97 (in ($1,000s)2), the
standard deviation is 𝑆𝐷 𝑋 = 𝜎 = 3.158 or $3,158.

c. What is the total annual amount that Brad can expect to pay in bonuses if he has 25
employees?
If Brad has 25 employees, we can expect to pay $4,200*25 = $105,000 in bonuses.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-25
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 Exercises 5.2

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-26
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
14. Calculate the mean, the variance and standard deviation of
the following discrete probability distribution. X P(X=x)
• E(X) or mean 5 0.35
• = 5 x 0.35 + 10 x 0.30 + 15 x 0.20 + 20 x 0.25 10 0.30
• = 10.75 15 0.20
• Variance 20 0.15

• = ∑ 𝒙𝒊 − 𝝁 𝟐 𝑷 𝑿 = 𝒙𝒊 = (5 – 10.75)2 x 0.35 + …..+ (20 –

10.75)2 x 0.15 = 28.19
• Standard deviation
• = 28.19
• = 5.31

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-27
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
 5.2 CONSUMER’S RISK PREFERENCE
• Risk-averse consumers
– Demand positive expected gain as compensation
for taking risk
– May decline a risky prospect even if it offers a
positive expected gain
• Risk-neutral consumers
– Completely ignore risk
– Always accept a prospect that offers a positive
expected gain
• Risk-loving consumers
– May accept a risky prospect even if the expected
gain is negative

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-30
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
5.2 CONSUMER’S RISK PREFERENCE
• Example: Suppose you have a choice of receiving $1,000 in cash
or receiving a beautiful painting from your grandmother. The
painting has a 20% chance worth $2000, a 50% chance worth
1,000, and a chance worth of 500.
– The actual value of the painting is uncertain.
– What should you do?

• The expected value: 𝐸 𝑋 = 𝜇 = ∑ 𝑥! 𝑃 𝑋 = 𝑥! = is $1,050

• Expected value > $1,000 it may seem logical to choose the
painting
• But a risk-averse person might not agree, will take the painting.
• Risk-neutral consumer will take the painting because it is
expected to exceeds the risk-free cash ($1000)
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-31
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
 5.3 Portfolio Returns (1)
• Investment opportunities often use:
– Expected return as a measure of reward
– Variance or standard deviation of return as a measure of risk
• A portfolio is defined as a collection of assets such as
stocks and bonds.
• The expected return and variance of a portfolio depend
on the joint distribution of random variables.
• Let X and Y be random variables for the returns of two
assets (stocks and bonds).
• If an investor has invested in both, the return generated by
the portfolio is a linear combination X+Y.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-37
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-38
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.3 Summary Measures for a Portfolio
• Let 𝑅" be the random variable for the return of the portfolio with
assets A and B.
• Let 𝑅# and 𝑅$ be random variables for the returns of assets A and
B with weights 𝑤# and 𝑤$ where 𝑤# + 𝑤$ = 1
• Expected return of the portfolio is 𝐸 𝑅% = 𝑤# 𝐸 𝑅# + 𝑤$ 𝐸 𝑅$
• Variance of the portfolio is
𝑉𝑎𝑟 𝑅% = 𝑤# & 𝜎 &# + 𝑤$ & 𝜎 &$ + 2𝑤# 𝑤$ 𝜌#$ 𝜎# 𝜎$
• The standard deviation 𝑆𝐷 𝑅" is the positive square root of the
variance
• The risk of the portfolio depends on the risk of the assets but he
interplay between them.
– E.g. if one asset does poorly, the second may serve as an offsetting factor
– The correlation is easier to interpret

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-39
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-40
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-41
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.3 Portfolio Returns (4)
• Example: consider an investment portfolio of $40,000 in
stock A and $60,000 in stock B, with the summary of
measures in table

a. Calculate the expected return of the portfolio.

b. Calculate the correlation between the returns.
c. Calculate the variance and standard deviation of the
portfolio.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-42
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.3 Portfolio Returns (5)
• Example continued
56,666 96,666
• 𝑤4 = 766,666 = 0.40, 𝑤8 = 766,666 = 0.60
a. 𝐸 𝑅: = 0.40×9.5% + 0.60×7.6% = 8.36%
7;.96
b. 𝜌48 = = 0.1754; the returns have a
7=.>?×;.=6
weak positive linear relationship
c. 𝑉𝑎𝑟 𝑅: = 0.40 = 12.93 = + 0.60 = 8.20 = +
2 0.40 0.60 0.1754 12.93 8.20 = 59.89%= ;
the standard deviation is 7.74%

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-43
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 Solve Exercises 5.3

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-44
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
 5.4 The Binomial Distribution (1)
• Different types of experiments generate different probability
distributions.
– Binomial
– Poisson
– Hypergeometric (not part of syllabus)
• A Bernoulli process consists of a series of n independent
and identical trials of an experiment such that on each trial:
– There are only two possible outcomes: success and failure
– The probabilities of success and failure remain the same from trial to
trial
• Use p to denote the probability of success, and 1− p is
the probability of failure.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-48
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.4 The Binomial Distribution (2)
• A binomial random variable X is defined as the number of
successes achieved in the n trials of a Bernoulli process.
– The possible values are 0, 1, … , n
– The binomial distribution or binomial probability distribution shows the
probabilities associated with the possible values
• Examples:
– A customer defaults or does not default on a loan
– A consumer reacts positively or negatively to a social media campaign
– A drug is either effective or ineffective
• Before arriving at a general formula for the distribution, we
construct a probability tree to illustrate the outcomes and
probabilities.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-49
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.4 The Binomial Distribution (3)
• Example: 85% of customers will use a credit card

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-50
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.4 The Binomial Distribution (4)
• For a binomial random variable X, the probability of x
successes in n Bernoulli trials is
𝑛 ' ()' (!
𝑃 𝑋=𝑥 = 𝑝 1−𝑝 = '! ()' ! 𝑝 ! 1 − 𝑝 "#!
𝑥
– This is for 𝑥 = 0, 1, 2, … , 𝑛
– By definition, 0! = 1
• There are two parts of the formula.
𝑛 "!
– The first term, = , tells us how many sequences with x successes
𝑥 !! "#! !
and n−x failures are possible in n trials.
– The second part of the equation, 𝑝 ! 1 − 𝑝 "#! , represents the probability of
any particular sequence with x successes and n−x failures.
• The mean is 𝐸 𝑋 = 𝜇 = 𝑛𝑝
• The variance is 𝑉𝑎𝑟 𝑋 = 𝜎 $ = 𝑛𝑝(1 − 𝑝)
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-51
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.4 The Binomial Distribution (5)
• Example: in the United States, about 30% of adults have
four-year college degrees. Suppose five adults are randomly
selected.
a. What is the probability that none of the adults have a college
degree?
b. What is the probability that no more than two of the adults
have a college degree?
c. What is the probability that at least two of the adults have a
college degree?
d. Calculate the expected value, variance and the standard
deviation of the distribution.
e. Graphically depict the distribution.
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-52
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.4 The Binomial Distribution (6)
• Example continued
• This problem is a Bernoulli process with 𝑛 = 5 adults.
– Either an adult has a college degree
, or they do not
– Probability 𝑝 = 0.30
5!
a. 𝑃 𝑋 = 0 = 0.30 6× 0.70 5)6 =0.1681
6! 5)6 !
b. 𝑃 𝑋 ≤ 2 = 𝑃 𝑋 = 0 + 𝑃 𝑋 = 1 + 𝑃 𝑋 = 2
= 0.1681 + 0.3602 + 0.3087 = 0.8370
c. 𝑃 𝑋 ≥ 2 = 𝑃 𝑋 = 2 + 𝑃 𝑋 = 3 + ⋯ + 𝑃 𝑋 = 5
= 0.3087 + 0.1323 + ⋯ + 0.0024 = 0.4717
Or 𝑃 𝑋 ≥ 2 = 1 − 𝑃 𝑋 = 0 + 𝑃(𝑋 = 1)

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-53
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.4 The Binomial Distribution (7)
• Example continued
d. Mean: 𝐸 𝑋 = 5×0.30 = 1.5 adults
Variance is 𝑉𝑎𝑟 𝑋 = 5×0.30× 1 − 0.30 = 1.05 adults2
Standard deviation 𝑆𝐷 𝑋 = 1.02 adults
e.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-54
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.4 The Binomial Distribution (8)
• Excel and R functionality

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-55
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 Solve Exercises 5.4

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-56
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS
 5.5 The Poisson Distribution (1)
• An experiment satisfies a Poisson process if:
– The number of successes with a specified time or space interval
equals any integer between zero and infinity
– The number of successes counted in nonoverlapping intervals are
independent
– The probability of success in any interval is the same for all intervals
of equal size and is proportional to the size of the interval
• Examples:
– The number of customers who use a new banking app in a day
– The number of spam emails received in a month
– The number of defects in a 50-yard roll of fabric
• A Poisson random variable is the number of successes
achieved in a specified time or space interval.

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-60
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.5 The Poisson Distribution (2)
• For a Poisson random variable X, the
probability of x successes over a given
! !" " #
interval of time or space is 𝑃 𝑋 = 𝑥 =
#!
– This is for 𝑥 = 0, 1, 2, ⋯
– 𝜇 is the mean number of successes
– 𝑒 ≈ 2.718 is the base of the natural logarithm
• The mean is 𝐸 𝑋 = 𝜇
• The variance is 𝑉𝑎𝑟 𝑋 = 𝜎 % = 𝐸(𝑋) = 𝜇

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-61
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.5 The Poisson Distribution (3)
• Example: Anne is concerned about staffing needs at the
Starbucks that she manages. She believes that the typical
Starbucks customer averages 18 visits to the store over a 30-
day month.
a. How many visits should Anne expect in a 5-day period from
a typical Starbucks customer?
b. What is the probability that a customer visits the chain five
times in a 5-day period?
c. What is the probability that a customer visits the chain no
more than two times in a 5-day period?
d. What is the probability that a customer visits the at least
three times in a 5-day period?

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-62
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.5 The Poisson Distribution (4)
• Example continued
a. Given the rate of 18 visits over a 30-day month, the mean for
the 30-day period as 𝜇'( = 18. So the mean for the 5-day
period is 𝜇) = 3
* %& ''
b. 𝑃 𝑋=5 = = 0.1008
)!
c. 𝑃 𝑋 ≤2 =𝑃 𝑋 =0 +𝑃 𝑋 =1 +𝑃 𝑋 =2
= 0.0498 + 0.1494 + 0.2241 = 0.4233
d. 𝑃 𝑋 ≥ 3 = 𝑃 𝑋 = 3 + 𝑃 𝑋 = 4 + ⋯
– Cannot be found since there is an infinite number of
possibilities
– 𝑃 𝑋 ≥3 =1− 𝑃 𝑋 =0 +𝑃 𝑋 =1 +𝑃 𝑋 =2
= 1 − 0.4233 = 0.5767
BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-63
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 5.5 The Poisson Distribution (5)
• Excel and R functionality

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-64
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 Solve Exercises 5.5

BUSINESSCopyright
STATISTICS: COMMUNICATING
©2022 McGraw WITH NUMBERS,
Hill. All rights reserved. 4eor| distribution
No reproduction Jaggia, Kellywithout the prior written
5-65
consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill. STATISTICS | Jaggia, Kelly
BUSINESS