QUANTITATIVE TECHNIQUES FOR
FINANCE/ STATISTICS AND
ECONOMETRICS FOR
FINANCE/ECONOMETRICS : MFI, MA, MAF,
MBF, MEF
FACILITATOR :Dr. Christopher Marushwa
November 2024
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Probability and Distribution
1. Probability Distribution of Continuous random variables
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Probability Distribution
Continuous random variables
Continuous random variable takes all real values in a given domain.
Recalling a discrete random distribution
R the sigma notation Σ is
substituted by an integral sign and P (X = x) by a function of x i.e
f (x).
Therefore we have the following
Z
1.P (X = x) = ΣP (X = x) = 1 = f (x) dx (1)
Z
2.E (x) = ΣxP (X = x) = xf (x) dx (2)
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Z
2
3.E (x) = Σx P (X = x) = x 2 f (x) dx (3)
Z
2 2 2 2
x 2 f (x) dx − x 2 (4)
[Link] (x) = E x − x = Σx P (X = x) − x =
sZ
p
5.S.D = Var (x) = x 2 f (x) dx − x 2 (5)
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Examples
1. The continuous random variable has the P.D.F
kx for 0≤x ≤2
f (x) = k (4 − x) for 2≤x ≤4 (6)
0 for otherwise
Find
(a) The value
of k
1 1
(b) The P ≤x ≤2
2 2
2. The continuous random variable X has the P.D.F
1 2
27 x
for 0 ≤ x ≤ 3
f (x) = 1 (7)
for 3 ≤ x ≤ 5
3
0 for otherwise
Find
(a) E (x)
(b) E x 2 , (c) Variance , (d) Standard deviation.
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Solutions
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Normal probability Distribution
It is symmetrical about the mean
It is given by the distribution as X ∼ N µ, σ 2 after standardization
X ∼ N (0, 1)
The normal probability distribution is one of the most important types of
continuous probability distribution.
The graph of the probability density function of a normal distribution has
a distinctive bell shape which is symmetric about the mean.
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Properties of a normal distribution
i. Symmetrical about the mean
ii. Mean =Mode=Median
iii 68% shows P (µ − σ < x < µ + σ)
95.25% shows P (µ − 2σ < x < µ + 2σ)
99.75% shows P (µ − 3σ < x < µ + 3σ)
The normal distribution has P.D.F
(x − µ)2
1
f (x) = √ e− for −∞ < x < ∞ (8)
σ 2π 2σ 2
Where µ is mean, σ is standard deviation
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To work with the given P.D.F is very tedious, therefore the standard values
are given by the following formula
x −µ
z= (9)
σ
The probability percentages are read from the table or calculators
Example1
Using tables or calculator find
Find (i.) P (z ≥ 2.1), (ii.) P (z ≤ −1.95), (iii.) P (z < 1.83), (iv )
P (−0.46 < z < 2.21), (v ) Find z given P (z ≤ z1 ) = 0.9678, (vi)
P (z ≥ z1 ) = 0.1949 (vii) P (−z1 ≤ z ≤ z1 ) = 0.95, (viii)
P (−z1 ≤ z ≤ z1 ) = 0.6156, (ix) P (−z1 ≤ z ≤ z2 ) = 0.9,
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Solutions
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2. A machine fills jars with jam so that the weight of jam is normally
distributed with mean 500g and standard deviation 6g. Find the probability
that the weight of a jam in a jar is selected at random is less than 490g.
2. In a sample of 100 cases, the mean of a certain test is 14 and standard
deviation 2.5. Assuming that the distribution is normally distributed . Find
(a) How many students score between 12 and 15.
(b) above 18
(c) below 8
(d) how many score 16?
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Solutions
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Examples...
i. Packages from a packing machine have mass which is normally
distributed with mean 200g and standard deviation 2g. Find the
probability that the package from the machine weights
(a)less than 197g
(b) more than 200.5g
(c) above 18,Between 198.5 and 199.5g
ii. John and Anna have standard scores of 0.8 and -0.4 respectively in
Economics exams. Iif their marks were 88 and 64 respectively. Find
the mean, Variance and standard deviation of marks.
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Solutions
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Solutions
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THANK YOU
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