Discrete Probability Distributions

Dr. Avanti Sethi

University of Texas at Dallas

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Types of Random Variables

DISCRETE RANDOM VARIABLE A random variable that can assume only

certain clearly separated values. It is usually the result of counting something.

CONTINUOUS RANDOM VARIABLE can assume an infinite number of values

within a given range. It is usually the result of some type of measurement
 Distribution Functions
Consider the probability distribution for a digital channel
Example where X is a random variable measuring number of bits transmitted
with an error
x P(X=x)
0 0.6561
1 0.2916
2 0.0486
3 0.0036
4 0.0001
1.0000

Find the probability of three or fewer bits in error.

• The event (X ≤ 3) is the total of the events: (X = 0), (X = 1), (X = 2), and (X = 3).
• From the table:

P(X ≤ 3) = P(X = 0) + P(X = 1) + P(X = 2) + P(X = 3) = 0.9999

Example – Probability distribution

A mutual fund salesperson has arranged to call on three people

tomorrow. Based on past experience the salesperson knows that there
is a 20% chance of closing a sale on each call. Determine the
probability distribution of the number of sales the salesperson will
make.

Let S denote success, i.e. closing a sale P(S)=.20

Thus SC is not closing a sale, and P(SC)=.80
 Example . . .
Developing a Probability Distribution…

Sales Call 1 Sales Call 2 Sales Call 3

P(S)=.2 SSS
P(S)=.2
P(SC)=.8 S S SC
X P(x)
P(S)=.2
P(S)=.2 S SC S 3 .23 = .008
P(SC)=.8
4 3(.032)=.096
P(SC)=.8 S S C SC 5 3(.128)=.384
P(S)=.2 SC S S 0 .83 = .512
P(SC)=.8 P(S)=.2
P(SC)=.8 SC S S C
P(S)=.2 SC SC S
P(SC)=.8
P(SC)=.8 SC SC SC
P(X=2) is illustrated here…
The Mean of a Probability Distribution

MEAN
•The mean is a typical value used to represent the
central location of a probability distribution.

•The mean of a probability distribution is also

referred to as its expected value.

𝜇=∑ [ 𝑥𝑃(𝑥)]
Weighted Mean
• The weighted mean of a set of numbers X1, X2, ...,
Xn, with corresponding weights w1, w2, ...,wn, is
computed from the following formula:

𝑤1 𝑥 1 +𝑤2 𝑥2 +𝑤 3 𝑥 3 +. . .+𝑤𝑛 𝑥𝑛
𝑋=
𝑤 1+𝑤 2 +𝑤3 + .. . 𝑤𝑛
EXAMPLE – Weighted Mean

The Carter Construction Company pays its hourly

employees $16.50, $19.00, or $25.00 per hour.
There are 26 hourly employees, 14 of which are paid
at the $16.50 rate, 10 at the $19.00 rate, and 2 at the
$25.00 rate. What is the mean hourly rate paid to the
26 employees?
 The Variance and Standard
Deviation of a Probability Distribution
VARIANCE AND STANDARD DEVIATION
• Measures the amount of spread in a distribution
• The computational steps are:
1. Subtract the mean from each value, and square this difference.
2. Multiply each squared difference by its probability.
3. Sum the resulting products to arrive at the variance.

The standard deviation is found by taking the positive square root of the
variance.

𝜎 =∑ [ ( 𝑥−𝜇 ) 𝑃(𝑥)]
2 2
Mean, Variance, and Standard
Deviation of a Probability Distribution - Example

John Ragsdale sells new cars for Pelican Ford. John usually sells the largest number of
cars on Saturday. He has developed the following probability distribution for the
number of cars he expects to sell on a particular Saturday.
Mean of a Probability Distribution - Example
Variance and Standard
Deviation of a Probability Distribution - Example

𝜎 =∑ [ ( 𝑥−𝜇 ) 𝑃(𝑥)]
2 2

𝜎 = √ 𝜎 2=1.136
Laws of Expected Value…
E(c) = c
E(X + c) = E(X) + c
E(cX) = cE(X)

Laws of Variance…
V(c) = 0
V(X + c) = V(X)
V(cX) = c2V(X)
 Unit conversion

• The mean length of the cables is 18 ft and the variance is 36 sq feet.

Convert these measurements into yards. (1yard = 3 feet)

Mean = 18 / 3 = 6 yards
Variance = 36 * (1/3)2 = 36/9 = 4 sq yards
Std dev = 2 yards
Bivariate Distributions…

Up to now, we have looked at univariate distributions, i.e. probability

distributions in one variable.

As you might guess, bivariate distributions are probabilities of

combinations of two variables.

Bivariate probability distributions are also called joint probability. A

joint probability distribution of X and Y is a table or formula that lists
the joint probabilities for all pairs of values x and y, and is denoted
P(x,y).
P(x,y) = P(X=x and Y=y)
Discrete Bivariate Distribution…

As you might expect, the requirements for a bivariate distribution are

similar to a univariate distribution, with only minor changes to the
notation:

for all pairs (x,y).

Example 7.5…

Xavier and Yvette are real estate agents. Let X denote the number of
houses that Xavier will sell in a month and let Y denote the number of
houses Yvette will sell in a month. An analysis of their past monthly
performances has the following joint probabilities (bivariate probability
distribution).
Marginal Probabilities…

As before, we can calculate the marginal probabilities by summing

across rows and down columns to determine the probabilities of X and
Y individually:

E.g the probability that Xavier sells 1 house = P(X=1) =0.50

Describing the Bivariate Distribution…

We can describe the mean, variance, and standard deviation of each

variable in a bivariate distribution by working with the marginal
probabilities…

same formulae as for univariate

distributions…
Covariance…

The covariance of two discrete variables is defined as:

Sum of Two Variables…

The bivariate distribution allows us to develop the probability

distribution of any combination of the two variables, of particular
interest is the sum of two variables.

If we consider our example of Xavier and Yvette selling houses, we can

create a probability distribution…

…to answer questions like “what is the probability that two houses are
sold”?
P(X+Y=2) = P(0,2) + P(1,1) + P(2,0) = .07 + .06 + .06 = .19
 Sum of Two Variables…
Likewise, we can compute the expected value, variance, and
standard deviation of X+Y in the usual way…

E(X + Y) = 0(.12) + 1(.63) + 2(.19) + 3(.05) + 4(.01) = 1.2

V(X + Y) = (0 – 1.2)2(.12) + … + (4 – 1.2)2(.01) = .56

 x  y  Var (X  Y)  .56  .75

Laws…

We can derive laws of expected value and variance for the sum of two
variables as follows…

E(X + Y) = E(X) + E(Y)

V(X + Y) = V(X) + V(Y) + 2COV(X, Y)

If X and Y are independent, COV(X, Y) = 0 and thus

V(X + Y) = V(X) + V(Y)
Laws

E(X + Y) = E(X) + E(Y) = .7 + .5 = 1.2

V(X + Y) = V(X) + V(Y) + 2COV(X, Y)

= .41 + .45 + 2(-.15) = .56

 Variance of a portfolio with multiple stocks

2 stocks

3 stocks
 Return and Risk of a Two-Asset Portfolio

Assume that as a U.S. investor, you decide to hold a portfolio with 80 percent
invested in the S&P 500 U.S. stock index and the remaining 20 percent in the
MSCI Emerging Markets index.

The expected return is 9.93 percent for the S&P 500 and 18.20 percent for the
Emerging Markets index.

The risk (standard deviation) is 16.21 percent for the S&P 500 and 33.11
percent for the Emerging Markets index.

What will be the portfolio’s expected return and risk given that the covariance
between the S&P 500 and the Emerging Markets index is 0.0050?
 Return and Risk of a Two-Asset Portfolio
RP  w1 R1  w2 R2  0.80  0.0993  0.20  0.1820 
 0.1158  11.58%

 P2  w12 12  w22 22  2 w1w2Cov R1 , R2 

   
 0.80 2  0.16212  0.20 2  0.33112  (2  0.80  0.20  0.0050)
 0.02281

 P  w12 12  w22 22  2 w1w2Cov R1 , R2 

 0.02281  0.1510  15.10%
Bernoulli Trials

Bernoulli Trials
• Definition: A Bernoulli trials process is a sequence of n chance
experiments such that:
1. Each experiment has two possible outcomes, which we may call success
and failure.
2. The probability p of success on each experiment is the same for each
experiment and this probability is not affected by any knowledge of
previous outcomes.
• The probability q of failure is given by q = 1 − p

34
 Binomial Distribution
What is the probability that in n Bernoulli trials there are exactly x successes
• A fair coin is tossed six times. What is the probability that 3 heads turn up?
• A die is rolled four times. What is the probability that we obtain exactly one 6?

Characteristics of a Binomial Distribution

• There are only two possible outcomes on a particular trial of an experiment.
• The outcomes are mutually exclusive,
• The random variable is the result of counts.
• Each trial is independent of any other trial

A mutual fund salesperson has arranged to call on three people tomorrow. Based on
past experience the salesperson knows that there is a 20% chance of closing a sale on
each call. Determine the probability distribution of the number of sales the
salesperson will make. Is this a Binomial Distribution? Under what assumption?

35
 Binomial Probability Distribution

Expected Value E(x) =  = np

Variance Var(x) =  2 = np(1 - p)

Standard Deviation 𝜎 = √ 𝑛𝑝(1 −𝑝 )

The probability of a flight being late is 15%. If 20 flights are scheduled to come, then

How many flights are expected to be late?

= 20 x .15 = 3

What is the variance of the number of late flights?

= 20 x .15 x (1 - .15) = 2.55
Binomial Distribution Problem
Twenty percent of the worm gears produced by an automatic, high-speed
Carter-Bell milling machine are defective. The machine has just produced 18
gears.

Use the table (next slide) to find the probability of

• Zero defective: .0180 = 1.8%

• Exactly three defective: .2297 = 22.97%

• Three or less defective: .0180 + .0811 + .1723 + .2297 = .5011

• Four or more defective: 1 - .5011 = .4989

Binomial table for n = 18
probability of success

0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

n X
18 0 0.1501 0.0536 0.0180 0.0056 0.0016 0.0004 0.0001
1 0.3002 0.1704 0.0811 0.0338 0.0126 0.0042 0.0012 0.0003 0.0001
2 0.2835 0.2556 0.1723 0.0958 0.0458 0.0190 0.0069 0.0022 0.0006
3 0.1680 0.2406 0.2297 0.1704 0.1046 0.0547 0.0246 0.0095 0.0031
4 0.0700 0.1592 0.2153 0.2130 0.1681 0.1104 0.0614 0.0291 0.0117
5 0.0218 0.0787 0.1507 0.1988 0.2017 0.1664 0.1146 0.0666 0.0327
6 0.0052 0.0301 0.0816 0.1436 0.1873 0.1941 0.1655 0.1181 0.0708
7 0.0010 0.0091 0.0350 0.0820 0.1376 0.1792 0.1892 0.1657 0.1214
8 0.0002 0.0022 0.0120 0.0376 0.0811 0.1327 0.1734 0.1864 0.1669
9 0.0004 0.0033 0.0139 0.0386 0.0794 0.1284 0.1694 0.1855
10 0.0001 0.0008 0.0042 0.0149 0.0385 0.0771 0.1248 0.1669
11 0.0001 0.0010 0.0046 0.0151 0.0374 0.0742 0.1214
12 0.0002 0.0012 0.0047 0.0145 0.0354 0.0708
13 0.0002 0.0012 0.0045 0.0134 0.0327
14 0.0002 0.0011 0.0039 0.0117
15 0.0002 0.0009 0.0031
16 0.0001 0.0006
17 0.0001
18
 Binomial Probability Distributions – Using Excel
(BINOMDIST in Excel 2010)

A study by the Illinois Department of Transportation concluded that 76.2 percent

of front seat occupants used seat belts. A sample of 12 vehicles is selected.

What is the probability the front seat occupants in exactly 7 are wearing seat
belts?

What is the probability that less than 3 will be wearing seat belts?

What is the probability that more than 4 people will be wearing seat belts?

What is the probability that between 3 and 8 people will be wearing seat belts?
 Who is counting . . .

Common housefly females lay up to 500 eggs at a time. The eggs hatch into
larvae which go through several molting stages and then transform into pupae.
Thirty-six hours after emerging from pupae, females are receptive for mating.
Adult flies live 15-30 days, during which time, females lay eggs repeatedly though
they mate only once. Over a 4-5 month period, the descendants of a single
mating pair of house flies potentially could number 1920. If that actually occurred,
we very quickly would be up to our armpits in fly bodies all over the planet and
the piles would grow at a rapidly increasing rate. Fortunately, most fly eggs,
larvae, and pupae are killed by other insects and microscopic parasites
Poisson Probability Distribution
The Poisson probability distribution describes the number of times some
event occurs during a specified interval. The interval may be time,
distance, area, or volume.

Assumptions of the Poisson Distribution

(1) The probability is proportional to the length of the interval.
(2) The intervals are independent.

Examples include:
• The number of misspelled words per page in a newspaper.
• The number of calls per hour received by Dyson Vacuum Cleaner Company.
• The number of potholes in 1 mile.
• The number of customers coming to a bank in an hour.