Business Statistics: A First Course

BMGT230/BMGT230B

Chapter 8: Random Variables and Probability Models

8.1 Expected Value of a Random Variable
Random variable: Assumes any of several different values as a result of some random event.
Random variables are denoted by a capital letter, such as X.
Discrete random variable: a random variable that can take one of a finite number of distinct
outcomes.
Continuous random variable: A random variable that can take any numeric value within a
range of values. The range may be infinite or bounded at either or both ends.
For both discrete and continuous variables, the collection of all the possible values and the
probabilities associated with them is called the probability model for the random variable.
The expected value of a discrete random variable is found by multiplying each possible value of the
random variable by the probability that it occurs and then summing all those products. This gives the
general formula for the expected value of a discrete random variable:
= =

8.2 Standard Deviation of a Random Variable

Variance: The variance of a random variable is the expected value of the squared deviations from
the mean. For discrete random variables, it can be calculated as:
! = =

! () =

! .

Thus, the standard deviation of a random variable will just be the square root of the Variance:
= =

() =

! .

8.3 Properties of Expected Values and Variances

Adding A Constant c:
= ,
= ,
= .
Multiplying by a Constant a:
= ,
= ! .
,

,

! .
= .
Addition Rule for Expected
Values of Random Variables:
= ()
Addition Rule for Variances of
(Independent) Random Variables:
= +
.

Business Statistics: A First Course

8.4 Discrete Probability Models

BMGT230/BMGT230B

Bernoulli Trials:
There are only two possible outcomes (called success and failure) for each trial.
The probability of success, denoted p, is the same on every trial. (The probability of failure,
1- p is often denoted q.)
The trials are independent.
The Binomial Model:
Whenever the random variable of interest is the number of successes in a series of Bernoulli trials,
its called a Binomial random variable. It takes two parameters to define this Binomial
probability model: the number of trials, n, and the probability of success, p. We denote this model
Binom(n, p).
Binomial model for Bernoulli trials: Binom(n, p)
n = number of trials
p = probability of success (and q = 1 p = probability of failure)
X = number of successes in n trials
= =
Mean: =
Standard deivation: =

! !!!

!
,
=

! ( )!

8.5 Continuous Random Variables

For any continuous random variable, the distribution of its probability can be shown with a curve.
That curve is the probability density function (pdf), usually denoted as f(x).
Normal Model: The most famous continuous probability model, the Normal is used to model a wide
variety of phenomena whose distributions are unimodal and symmetric. The Normal model is also
used as an approximation to the Binomial model for large n, when np and nq 10, and is used as the
model for distributions of sums and means under a wide variety of conditions.
z-scores:
For Data:

For Models:

The 68-95-99.7 Rule:

68-95-99.7 Rule (Empirical Rule): In a Normal model, 68% of values fall within one standard
deviation of the mean, 95% fall within two standard deviations of the mean, and 99.7% fall within
three standard deviations of the mean.

Business Statistics: A First Course

BMGT230/BMGT230B
The Normal Model for the Binomial: Binomial Approximation
When dealing with binomial models, when n is large, and p is not too close to zero or one, areas
under the normal curve with mean np and variance npq can be used to approximate binomial
probabilities.
Conditions:
Success/Failure Condition: A Binomial model is approximately Normal if we expect at least 10
successes and 10 failures.
Continuity Correction:
> = > + 0.5
= 0.5
< = < 0.5
= + 0.5
= = 0.5 < < + 0.5