Business Data Analysis

MODULE - IV
PROBABILITY AND PROBABILITY DISTRIBUTIONS

INTRODUCTION
Probability theory is a well established branch of mathematics that finds applications in every
area of scholarly activity from music to physics, and in daily experience from weather
prediction to predicting the risks of new medical treatments. At its simplest, it’s concerned
with the roll of a dice, or the fall of the cards in a game. Probability is a branch of
mathematics that deals with calculating the likelihood of a given event's occurrence.
Probability may be defined as a numerical measure which indicates the chance of occurrence
and deals with chance and experimentation.
The probability that an event will occur is a number between 0 and 1. The higher the
probability of an event, the more likely it is that the event will occur.
Example:

Experiment
An experiment is an act of conducting a controlled test or an investigation. It may be
deterministic or probabilistic.
The experiments which have only one possible result or outcome i.e. whose result is certain
are called deterministic experiments. E.g. An experiment to verify the Law of Demand.
Experiments whose result is uncertain, where more than one possible results/outcomes are
involved, are called as probabilistic experiments. E.g. Experiment of tossing a coin.
Probabilistic experiment also called as a Random Experiment is an experiment which may
not result in the same outcome when repeated under the same conditions. It is an experiment
which does not have a unique outcome.
In a Random experiment the Probability of an event A is :

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 Sample Space: The set of all possible outcomes of a random experiment is the sample
space. It is denoted by S. For example: While throwing a die, the sample space is:
S = {1, 2, 3, 4, 5, 6}
 Event: is a subset of the sample space. They are denoted by A, B, C, etc. Example:
Obtaining an Even number while throwing a dice. It is an event, A = {2, 4, 6}. Thus, the
outcomes which belong to an event are called favorable outcomes. In the example above,
2, 4 and 6 are favorable outcomes.
An event which does not contain any outcome is a null event and it is denoted by Φ. An
event which has only one outcome is an elementary event/ Simple event. An event which
contains all the outcomes is equal to the sample space is called sure/certain event.
 Complement of an event: If ‘A’ is an event, then the complement of event A is the event
of non-occurrence of A. it means complement of event comprises of the outcomes not
favourable to A. it is denoted by A’ or Ā.
For example: In throw of a dice, if event A = {2, 4, 6} then Ā = {1, 3, 5}.
 Sub-Event: If A and B are two events such that event A occurs whenever event B occurs.
Then, event B is a sub-event of event A. Example: If A = {1, 3, 5} and B = {3} then B is
a sub-event of A.
 Union of Events: Union of two or more of events is the event of occurrence of at least
one of these events. Thus, Union of event is the event of occurrence of at least one of
them. The union of A and B is denoted as AUB OR (AorB).
Example: In a toss of two coins at a time, A = {HH} and B = {TT}, then, AUB = {HH,
TT}.
 Intersection of events: An Intersection of two or more events is the event of
simultaneous occurrence of all these events. Thus, intersection means the happening of
both the events. It is denoted by A∩B (AandB).
Example: In a toss of two coins, A = {HH, TT} and B = {HH, HT, TH, TT}, then A∩B =
{HH, TT}.
 Equally Likely Events: Two or more events are equally likely if they have equal chance
of occurrence. That is all the outcomes have equal probability of happening. Example: In
a coin toss, both outcomes ‘Head’ and ‘Tail’ have equal chances.

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Business Data Analysis

 Mutually exclusive events: Two or more events are mutually exclusive if only one of
them can occur at a time, they cannot occur together. That is the happening of one event
cancels the happening of the other events. Example: In the result of a test the outcomes
‘Pass’ and ‘Fail’ are mutually exclusive.
 Conditional Probability:
The conditional probability of an event B is the probability that the event will occur given
the knowledge that an event A has already occurred. This probability is written as P(B|A),
notation for the probability of B given A.
In the case where events A and B are independent (where event A has no effect on the
probability of event B), the conditional probability of event B given event A is simply the
probability of event B, that is P(B).
Conditional Probability of event B given A is:
P(B|A) = P(A∩B)
P(A)
Note: P(A) >0

Therefore, P(A∩B) = P(A) . P(B)

 Independent Events: Two events are called independent if the occurrence or non-
occurrence of one does not depend on the other in any way.
Two events are called independent only if, P(A∩B) = P(A) . P(B)

ADDITION THEOREM (theorem of total probability):

Let A and B be two events with respective probabilities P(A) and P(B). Then, the probability
of occurrence of at least one of these two events is:
P(AUB) = P(A) + P(B) – P(A∩B)
Here, P(A∩B) is the probability of simultaneous occurrence of A and B.
 For mutually exclusive events, P(AUB) = P(A) + P(B)
 For three events, P(AUBUC) = P(A) + P(B) + P(C) - P(A∩B) - P(A∩C) - P(B∩C) +
P(A∩B∩C)

MULTIPLICATION THEOREM (theorem of compound probability):

Let A and B be two events with respective probabilities P(A) and P(B). Let P(B|A) be the
conditional probability of event B given that A has happened. The, the probability of
simultaneous occurrence of A and B is:

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Business Data Analysis

P(A∩B) = P(A) . P(B|A)

For independent events,
P(A∩B) = P(A) . P(B)

RANDOM VARIABLE:
Random variable is a function which assigns a real number to every sample point in the
sample space. The set of such values is the range of the random variable.
It is a variable that takes values with certain probability. Generally random variables are
denoted by X, Y, Z, etc.
Two types of random variables are:
 Discrete random variable: only takes finite or countable many number of values.
 Continuous random variable: can take any value within a specified interval or continuum.

Mean for a Random Variable is E (X):

E(X) = Σx . p(x)

Variance for a Random Variable is Var (X):

Var (X) = E(X)2 – [E(X)]2
where, E(X)2 = Σx2 . p(x)

S.D. for a Random Variable is S.D.(X):

S.D. (X) = √ Var(X)

Probability Mass Function (p.m.f.):

If X is a discrete random variable, with its function p(x) = P{X = x}, then p(x) is the
probability mass function of X. Here, p(x) ≥ 0 for all x values and Σ p(x) = 1.

Probability Density Function (p.d.f.):

If X is a continuous random variable, with its function p(x) = P{X = x}, then p(x) is the
probability density function of X. Here, p(x) ≥ 0 for all x values and Σ p(x) = 1. It is denoted
by f(x).

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Business Data Analysis

PROBABILITY DISTRIBUTION
A systematic presentation of the values taken by a random variable and the corresponding
probabilities is called probability distribution of the random variable.
Mathematical Expectation of a random variable X: If X is a discrete random variable with
p.m.f. p(x), then the mathematical expectation of X is:
E(X) = Σ x.p(x)

Mathematical Expectation of a function h(X) of X:

If X is a discrete random variable with p.m.f. p(x), then the mathematical expectation of any
function h(X) of X is:
E[h(X)] = Σ h(x).p(x)

THEORETICAL PROBABILITY DISTRIBUTIONS

In a frequency distribution, when the allocation of individual probabilities is made for
different class intervals respectively it is called as Theoretical Probability Distribution. It
exists only in theory. The observed or (actual) frequency distribution may be similar to it.

The different types of theoretical distributions are:

1) Bernoulli Distribution
2) Binomial Distribution
3) Poisson Distribution
4) Normal Distribution

Bernoulli Distribution:
The performance of a fixed number of trials with fixed probability of success on each trial is
known as a Bernoulli trial. The Bernoulli distribution is a discrete distribution having two
possible outcomes labeled by n=0 and n=1 in which:
n=1 ("success") occurs with probability ’p’ and n=0 ("failure") occurs with probability q=1-p,
where 0<p<1.

The probability density function for Bernoulli distribution is:

P(n) = px q1-x

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Business Data Analysis

For a Bernoulli Distribution:

 Mean: E(X) = p
 Variance: Var(X) = pq
 Standard Deviation: S.D. (X) = √pq

Binomial Distribution:
A probability distribution which has the following probability mass function (p.m.f.) is called
Binomial Distribution:
p(x) = nCxpxqn-x
where, x= 0,1,2,……n; 0<p<1;q=1-p
Here, the variable X is discrete and it is called Binomial [Link] parameters of the
binomial distribution are n and p. For a binomial variate Mean>Variance
 Mean is E(X) = np
 Variance is Var(X) = npq
 Standard Deviation is S.D.(X) = √npq

Fitting Binomial Distribution:

A binomial distribution has two parameters, namely n and p. To fit a binomial distribution,
the values of n and p are found and then the theoretical probabilities are written down. The
theoretical frequencies are obtained by multiplying the probabilities by the total frequencies.
Tx = N X p(x)

Properties of Binomial Distribution

1) The mean is np (Mean > Variance).
2) The variance is npq. The standard deviation is √npq.
3) If p=0.5, the distribution is symmetrical.
4) Binomial distribution tends to Poisson distribution as :
pà0, n à∞ and np = λ is fixed
5) Binomial distribution tends to normal distribution if p as well as q are not very small and
n à∞

Poisson Distribution
A probability distribution which has the following probability mass function (p.m.f.) is called
Poisson distribution.

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Business Data Analysis

where x= 0,1,2,……; and λ > 0

Here, the variable X is discrete and it is called Poisson Variate. λ is the only parameter of
Poisson distribution. The Mean and Variance of Poisson distribution is equal, thus,
E(X) = Var(X) = λ
'e’: this is a constant whose value is equal to 2.718 approximately.
Fitting a Poisson Distribution:
Since poison distribution has only one parameter, to fit a Poison Distribution, the value λ of
has to be found. The theoretical frequencies are obtained by multiplying the probabilities by
the total frequency N. The Binomial distribution tends to Poisson Distribution under the
following conditions:
p is very small (pà0)
n is very large (n à∞)
np = λ is fixed
The theoretical frequencies are obtained by multiplying the probabilities by the total
frequencies.
Tx = N X p(x)

Properties of Poisson Distribution

 The mean is λ.
 The variance is λ and the standard deviation is √λ (Mean=Var)
 Poisson distribution is a limiting form of Binomial distribution where pà0, n à∞ and np
= λ is fixed.
 Poisson distribution tends to Normal distribution as λ à∞ (for large λ).

Normal Distribution
A probability distribution which has the following probability density function (p.d.f.) is
called Normal Distribution.

Where, -∞<x< ∞; σ >0

Here, the variable X is continuous and it is called Normal Variate. It has two parameters, μ
and σ (and π=3.14 and e=2.718)
Its Mean and Variance are:

Jain College of MCA and MBA, BelagaviProf. Vrushali Pakhannavar

Business Data Analysis

 Mean = E(X) = μ
 Variance = Var(X) = σ2
 S.D. (X) = σ

Properties of Normal Distribution

 The curve is Bell-shaped (it is symmetrical, i.e. M=Md=Mo)
 The curve is asymptotic to the X-axis. (it touches the x-axis only at - ∞ and + ∞).
 The curve has points of inflexion at μ - σ and μ + σ.
 The distribution is mesokurtic.
 Total area under curve is unity.
 For the distribution, S.D.=σ ; Q.D.=2/3σ and M.D. = 4/5σ

Standard Normal Variate (SNV)

A normal variate with mean μ = 0 and standard deviation σ = 1 is called Standard Normal
Variate. It is denoted by Z. Its p.d.f. is:

where, -∞<z< ∞

Let X be a normal variate with mean μ and standard deviation σ. Then,

Therefore, to find any probability regarding X, the Standard Normal Variate can be used.

Jain College of MCA and MBA, BelagaviProf. Vrushali Pakhannavar