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Normal Distribution & CLT

The document discusses key aspects of the normal distribution including its bell-shaped curve, parameters of mean and standard deviation, and properties like symmetry. It also covers standardized z-scores and how to calculate them. Examples are provided on using the normal distribution to calculate probabilities related to hours lost at a company and earnings per share. The central limit theorem is explained as why the distribution of sample means approaches normality as sample size increases. Finally, the sampling distribution of means and how standard error decreases with larger samples is covered.

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Aasim Bin Bakr
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18 views3 pages

Normal Distribution & CLT

The document discusses key aspects of the normal distribution including its bell-shaped curve, parameters of mean and standard deviation, and properties like symmetry. It also covers standardized z-scores and how to calculate them. Examples are provided on using the normal distribution to calculate probabilities related to hours lost at a company and earnings per share. The central limit theorem is explained as why the distribution of sample means approaches normality as sample size increases. Finally, the sampling distribution of means and how standard error decreases with larger samples is covered.

Uploaded by

Aasim Bin Bakr
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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PREPARED BY: FAIRUZ CHOWDHURY

Normal Distribution
It is a continuous distribution described by the bell-shaped curve and is observed in many natural
phenomena such as height, weight and GRE score.

Relevant parameters: mean (µ) and standard deviation (σ).

As the µ changes, the location of the distribution changes, and as the σ changes, the distribution becomes
narrower or wider.

Properties of normal distribution:

- Distribution is symmetric
- Mean, median and mode are all equal
- Range of x is unbounded
- Empirical rule applies.

Source: https://upload.wikimedia.org/wikipedia/commons/thumb/a/a9/Empirical_Rule.PNG/350px-Empirical_Rule.PNG

Standardized Values-z scores- Identifies the relative distance of an observation from the mean and is
independent of the units of measurement

The z-score for the ith observation in a data set is calculated as follows:

Negative z-scores indicates that xi lies to the left of the mean and positive z-scores indicates that xi
lies to the right of the mean. Since the formula divides by the standard deviation, s, the z-score
represents the distance from the mean in units of standard deviations

A z-score of 1.0 means that the observation is one standard deviation to the right of the mean.

A z-score of -1.5 means that the observation is 1.5 standard deviations to the left of the mean.
PREPARED BY: FAIRUZ CHOWDHURY

Problems:

Otis Elevator reported that the number of hours lost per week last year due to employees' illness was
approximately normally distributed with a mean of 60 hours and a standard deviation of 15 hours. For a
given week, determine the following probabilities.

a. The number of hours lost will exceed 85 hours.


b. The number of hours lost will be 45 to 55 hours.

For 2014, the Dow Jones 30 stock index companies had an average earnings per share of 5.40 with a
standard deviation of 3.52.

a. What is the probability that a company will have earnings per share that exceed $12?
b. What is the probability that earnings per share will be negative?
c. One of the companies in the Dow Jones 30 is stating that their earnings per share are in the 90th
percentile among their peers. What would you expect their earnings per share to be using a normal
distribution?

Central Limit Theorem


The central limit theorem states that if the sample size is large enough, the sampling distribution of the
mean is approximately normally distributed, regardless of the distribution of the population and the mean
of the sampling distribution will be same as that of the population.

Example:

Uniform distribution between 0 to 10.

We take random numbers from this interval and create 25 samples with sample size of 10. While looking
at the means of the 25 samples, we find variation in the statistic. Furthermore, the distribution of the
histogram of the sample mean depicts this issue. The reason behind this variation is sampling error.
Sampling error occurs as samples are only a subset of the total population and although we can minimize
it, we can’t avoid it. Finally, we look at the average and standard deviation of the sample means which
come to 5.011 and 0.8166 respectively.

We do the same thing with a larger sample size of 25 and work with 25 samples again. While the mean of
the samples is still close to 5, the standard deviation has reduced to 0.45. As we increase sample sizes to
100 and 500 progressively, we find that the mean is still close to 5, however, the standard deviations are
becoming smaller. Furthermore, the comparative histograms show that the sample means are being
clustered together around the expected value with increasing sample sizes.

Thus, we can conclude the distribution of sample means appear to assume the shape of normal distribution
for larger samples.

Furthermore, the theorem states that if the population is normally distributed, then the sampling
distribution of the men will be normal for any sample size.

This allows us to use the idea of calculating probabilities for normal distribution to draw conclusions about
sample means.
PREPARED BY: FAIRUZ CHOWDHURY

Sampling Distribution of Mean


The means of all possible samples of fixed size, n from some population will form a distribution that we
call the sampling distribution of mean (similar to the figure for 25 samples). The standard deviation of the
sampling distribution called standard error of mean is:

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐸𝑟𝑟𝑜𝑟 𝑜𝑓 𝑀𝑒𝑎𝑛 = 𝜎/√𝑛


As n increases, standard error decreases as found out earlier. This leads us to the conclusion that as we
obtain larger sample sizes, we increased our accuracy in estimating the true population mean as the
sampling distribution are clumped together. In other words, as we increase sample sizes, we decrease
sampling error.

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