Chapters

1. Introduction
2. Graphs
3. Descriptive statistics
4. Basic probability
5. Discrete
distributions
6. Continuous
distributions
7. Central limit
theorem Chapter 4
8. Estimation
9. Hypothesis testing
10. Two-sample tests
13. Linear regression
14. Multivariate
Probability
regression
 Random Experiment
A Random Experiment is an action or process that leads
to one of several possible outcomes.

Experiment Outcomes

Flip a coin Heads, Tails

Exam Marks Numbers: 0, 1, 2, ..., 100

Assembly Time t > 0 seconds

Course Grades F, D, C, B, A, A+

09/26/2025 Towson University - J. Jung 6.2

 Sample Space
• A list of exhaustive and mutually exclusive
outcomes is called a sample space, denoted by S.
– Exhaustive: ALL possible outcomes are included
– Mutually exclusive: no two outcomes can occur at the
same time
• The outcomes are denoted by O1, O2, …, Ok
• We can represent the sample space and its
outcomes as:
• S = {O1, O2, …, Ok}
• Example: coin flip sample space: S={heads, tail}

09/26/2025 Towson University - J. Jung 6.3

 Probabilities
• Given a sample space S = {O1, O2, …, Ok}, the
probabilities assigned to the outcome is a value
between zero and one, inclusive, describing the
relative possibility (chance or likelihood) the
outcome will occur
– Flip a coin: P(head) = P(tail) = 0.5
• Probability of occurrence = X / T
– X = number of ways in which event occurs
– T = total number of possible outcomes

09/26/2025 Towson University - J. Jung 6.4

 Probabilities
• The sum of the probabilities of all the
outcomes equals 1

– e.g. P(head) + P(tail) = 1

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 Two Types of Probabilities
1. Subjective probability: relies on opinion and belief.

2. Objective probability: relies on theory or

observation.

(a) Classical probability: depends on theory or math,

assuming that outcomes are equally likely, mutually
exclusive, and collectively exhaustive.

(b) Empirical (relative frequency) probability:

depends on observations, experience, or DATA.
09/26/2025 Towson University - J. Jung 6.6
 Events
• An Event is a collection of possible outcomes
• Sample space of rolling two dice:
• S={ (1,1), (1,2), (1,3), (1,4), (1,5), (1,6),
(2,1), (2,2), (2,3), (2,4), (2,5), (2,6),
(3,1), (3,2), (3,3), (3,4), (3,5), (3,6),
(4,1), (4,2), (4,3), (4,4), (4,5), (4,6),
(5,1), (5,2), (5,3), (5,4), (5,5), (5,6),
(6,1), (6,2), (6,3), (6,4), (6,5), (6,6)}
• Examples of events could be:
– Event A: first toss equals 1
– Event B: second toss equals 5
– Event C: the two tosses sum to 7
09/26/2025 Towson University - J. Jung 7
 Joint, Marginal, Conditional Probability…

• We study methods to determine probabilities of events

that result from combining other events in various
ways.
• There are several types of combinations and
relationships between events:
1. Complement event
2. Intersection of events
3. Union of events
4. Mutually exclusive events
5. Dependent and independent events
09/26/2025 Towson University - J. Jung 8
 Complement of an Event…
•The complement of event A is defined to be the
event consisting of all sample points that are
“not in A”.
•Complement of A is denoted by Ac
•The Venn diagram below illustrates the concept
of a complement.

•P(A) + P(Ac ) = 1
A Ac
09/26/2025 Towson University - J. Jung 9
 Complement of an Event…
•For example, the rectangle stores all the possible tosses of 2 dice
{(1,1), (1,2),… (6,6)}
•Let A = tosses totaling 7: A = {(1,6), (2, 5), (3,4), (4,3), (5,2), (6,1)}

•P(Total = 7) + P(Total not equal to 7) = 1

A Ac

09/26/2025 Towson University - J. Jung 6.10

 Intersection of Two Events…
The intersection of events A and B is the set of all
sample points that are in both A and B.

The intersection is denoted: A and B

The joint probability of

A and B is the probability of
the intersection of A and B,
A B
i.e. P(A and B)
09/26/2025 Towson University - J. Jung 6.11
 Intersection of Two Events…
For example, let A = tosses where first toss is 1 {(1,1), (1,2),
(1,3), (1,4), (1,5), (1,6)}
and B = tosses where the second toss is 5 {(1,5), (2,5), (3,5),
(4,5), (5,5), (6,5)}

The intersection is {(1,5)}

The joint probability of

A and B is the probability of A B
the intersection of A and B,
i.e. P(A and B) = 1/36
09/26/2025 Towson University - J. Jung 6.12
 Union of Two Events…
The union of two events A and B, is the event containing
all sample points that are in A or B or both:

Union of A and B is denoted: A or B

A B

09/26/2025 Towson University - J. Jung 6.13

 Union of Two Events…
For example, let A = tosses where first toss is 1 {(1,1), (1,2), (1,3),
(1,4), (1,5), (1,6)}
and B is the tosses that the second toss is 5 {(1,5), (2,5), (3,5),
(4,5), (5,5), (6,5)}

Union of A and B is {(1,1), (1,2), (1,3), (1,4), (1,5), (1,6)}

(2,5), (3,5), (4,5), (5,5), (6,5)}

A B
09/26/2025 Towson University - J. Jung 6.14
 Mutually Exclusive Events…
When two events are mutually exclusive (that is the two
events cannot occur together), their joint probability is 0,
hence:

A B

Mutually exclusive; no points in common…

For example A = tosses totaling 7 and B = tosses totaling 11

09/26/2025 Towson University - J. Jung 6.15

 Basic Relationships of Probability…
Complement of Event Union of Events

A Ac A B

Intersection of Events Mutually Exclusive Events

A B
A B

09/26/2025 Towson University - J. Jung 6.16

 Contingency Table
• A cross classification of two categorized variables.
• Why are some mutual fund managers more successful than others?
• One possible factor is whether the manager earned an MBA. The following
table compares mutual fund performance against whether the fund manager
earned an MBA:
Succeed Fail Total
MBA .11 .29 .40

Not MBA .06 .54 .60

Total .17 .83 1.00

E.g. This is the probability that a Succeed: means manager

mutual fund outperforms AND the outperformed the market
manager was in a MBA program; it’s a Fail: manager did NOT
joint probability.
outperform the market
09/26/2025 Towson University - J. Jung
6.17
 Marginal Probabilities…
• Marginal probabilities are computed by adding across rows
and down columns; that is they are calculated in the margins of
the table:
P(Not MBA) = .06 + .54
“what’s the probability a fund
manager isn’t from a MBA?”

Not Succeed
Succeed (B1) P(Ai)
(B2)
MBA (A1) .11 .29 .40

Not .06 .54 .60

MBA(A2)
P(B j)
P(Succeed) = .11 + .06
.17 .83 1.00
BOTH margins must add to 1
“what’s the probability a fund (useful error check)
outperforms the market?”
09/26/2025 Towson University - J. Jung 6.18
 Conditional Probability
• Conditional probability is used to determine how two
events are related; that is, we can determine the
probability of one event given the occurrence of another
related event.

• Conditional probabilities are written as P(A | B) and read

as “the probability of A given B” and is calculated as:

09/26/2025 Towson University - J. Jung 6.19

 Conditional Probability…
Again, the probability of an event given that another
event has occurred is called a conditional probability…

Note how “A given B” and “B given A” are related…

09/26/2025 Towson University - J. Jung 6.20
 Conditional Probability…
Example 6.2 What’s the probability that a fund
will outperform the market given that the
manager graduated from a top-20 MBA
program?
Recall:
A1 = Fund manager graduated from a top-20 MBA program
A2 = Fund manager did not graduate from a top-20 MBA program
B1 = Fund outperforms the market
B2 = Fund does not outperform the market

Thus, we want to know “what is P(B1 | A1) ?”

09/26/2025 Towson University - J. Jung 21
 Conditional Probability
• What’s the probability that a fund succeed given that the manager
graduated from an MBA program?
B1 B2 P(Ai)
A1 .11 .29 .40

A2 .06 .54 .60

P(Bj) .17 .83 1.00

• Thus, there is a 27.5% chance that that a fund will succeed given
that the manager graduated from a MBA program.
09/26/2025 Towson University - J. Jung 6.22
 Independence
• Event A and B are independent, if the probability of one event
is not affected by the occurrence of the other event. That is, if
P(A|B) = P(A) or P(B|A) = P(B)
• For example, we saw that
P(B1 | A1) = 0.275

• The marginal probability for B1 is: P(B1) = 0.17

• Since P(B1|A1) ≠ P(B1), B1 and A1 are not independent events.
• Stated another way, they are dependent. That is, the
probability of one event (B1) is affected by the occurrence of
the other event (A1).

09/26/2025 Towson University - J. Jung 6.23

 Union…
We stated earlier that the union of two events is
denoted as:
A or B. We can use this concept to answer
questions like:

Determine the probability that a fund

outperforms the market or the manager
graduated from a top-20 MBA program.

09/26/2025 Towson University - J. Jung 24

 Union…
Determine the probability that a fund outperforms (B1)
or the manager graduated from a top-20 MBA program (A1).

A1 or B1 occurs whenever:
A1 and B1 occurs, A1 and B2 occurs, or A2 and B1 occurs…

B1 B2 P(Ai)
A1 .11 .29 .40

A2 .06 .54 .60

P(Bj) .17 .83 1.00

P(A1 or B1) = .11 + .06 + .29 = .46

09/26/2025 Towson University - J. Jung 25
 Probability Rules and Trees…
• We introduce three rules that enable us to
calculate the probability of more complex
events from the probability of simpler
events…
1. The Complement Rule
2. The Multiplication Rule
3. The Addition Rule

09/26/2025 Towson University - J. Jung 6.26

 1 Complement Rule…
• The complement of an event A is the event that occurs when
A does not occur.

• The complement rule gives us the probability of an event

NOT occurring. That is:
A Ac
P(AC) = 1 – P(A)

• For example, in the simple roll of a die, the probability of the

number “1” being rolled is 1/6. The probability that some
number other than “1” will be rolled is 1 – 1/6 = 5/6.
09/26/2025 Towson University - J. Jung 6.27
 2 Multiplication Rule…
• The multiplication rule is used to calculate the joint
probability of two events. It is based on the formula for
conditional probability defined earlier:

• If we multiply both sides of the equation by P(B) we have:

P(A and B) = P(A | B)•P(B)

• Likewise, P(A and B) = P(B | A) • P(A)

• If A and B are independent events, then
P(A and B) = P(A)•P(B)
09/26/2025 Towson University - J. Jung 6.28
 Example
• A graduate statistics course has seven male and three
female students. The professor wants to select two
students at random to help her conduct a research project.
What is the probability that the two students chosen are
female?

• Let A represent the event that the first student is female

• P(A) = 3/10 = .30

• What about the second student?

09/26/2025 Towson University - J. Jung 6.29
 Example
• Let B represent the event that the second
student is female

• P(B | A) = 2/9 = .22

• That is, the probability of choosing a female

student given that the first student chosen is 2
(females) / 9 (remaining students) = 2/9
09/26/2025 Towson University - J. Jung 6.30
 Example
• A graduate statistics course has seven male and three female
students. The professor wants to select two students at
random to help her conduct a research project. What is the
probability that the two students chosen are female?

• Thus, we want to answer the question: what is P(A and B) ?

• P(A and B) = P(A)•P(B|A) = (3/10)(2/9) = 6/90 = .067

• “There is a 6.7% chance that the professor will choose two

female students from her grad class of 10.”

09/26/2025 Towson University - J. Jung 6.31

 Example
• The professor in Example 6.5 is unavailable. Her replacement
will teach two classes. His style is to select one student at
random and pick on him or her in the class. What is the
probability that the two students chosen are female?

• Let A represent the event that the first student picked at

random is female

• P(A) = 3/10 = .30

• What about the second class?

09/26/2025 Towson University - J. Jung 6.32
 Example
• Let B represent the event that the second
student is female. Because the same student
in the first class can be picked again for the
second class

• P(B | A) = P(B) = 3/10 = .30

09/26/2025 Towson University - J. Jung 6.33

 Example
• What is the probability that the two students chosen
are female?

• Thus, we want to answer the question: what is P(A

and B) ?

P(A and B) = P(A)•P(B) = (3/10)(3/10) = 9/100 = .09

• “There is a 9% chance that the replacement professor

will choose two female students from his two classes.”

09/26/2025 Towson University - J. Jung 6.34

 3 Addition Rule…
• The probability of event A or B or both A and B
occurring; i.e. the union of A and B.

P(A or B) = P(A) + P(B) – P(A and B)

A B = A + B –

If A and B are
P(A or B) = P(A) + P(B) – P(A and B) mutually exclusive,
then this term
09/26/2025 Towson University - J. Jung goes to zero6.35
 Example 6.7…
In a large city, two newspapers are published, the Sun and the Post. The
circulation departments report that 22% of the city’s households have a
subscription to the Sun and 35% subscribe to the Post. A survey reveals
that 6% of all households subscribe to both newspapers. What
proportion of the city’s households subscribe to either newspaper?

P(Sun or Post) = P(Sun) + P(Post) – P(Sun and Post)

= .22 + .35 – .06 = .51

“There is a 51% probability that a randomly selected household

subscribes to one or the other or both papers”
09/26/2025 Towson University - J. Jung 36
 Optional

09/26/2025 Towson University - J. Jung 37

 Probability Tree
• An effective and simpler method of applying
the probability rules is the probability tree,
wherein the events in an experiment are
represented by lines.
• The resulting figure resembles a tree, hence
the name.

09/26/2025 Towson University - J. Jung 38

 Probability Trees…
• A probability tree is a simple and effective method of applying
the probability rules by representing events in an experiment by
lines. The resulting figure resembles a tree. Recall Example 6.5.
Joint probabilities
First selection Second selection
2/9 P(FF)=(3/10)(2/9)
| F ) =
P(F
3/ 1 0
P(F )= P( M|F
) = 7/9
P(FM)=(3/10)(7/9)
= 3/ 9 P(MF)=(7/10)(3/9)
P( M | M )
) = 7/1 P(F
0
P( M|M
) = 6/9
P(MM)=(7/10)(6/9)

09/26/2025 Towson University - J. Jung 6.39

 Probability Trees…
• The probabilities associated with any set of branches from
one “node” must add up to 1.00…

First selection Second selection

F ) = 2/9
P(F| 2/9 + 7/9
= 3/1 0 = 9/9 = 1
P(F) P( M|F
) = 7/9

P( M )= 3/9
P( F | M
) = 7/1
0 3/9 + 6/9
P( M|M = 9/9 = 1
Handy way to check ) = 6/9
your work ! 3/10 + 7/10
= 10/10 = 1
09/26/2025 Towson University - J. Jung 6.40
 Probability Trees…
• Note: there is no requirement that the branches’ splits be
binary, nor that the tree only goes two levels deep, or that
there be the same number of splits at each sub node…

09/26/2025 Towson University - J. Jung 6.41

 Bayes’ Law…
Bayes’ Law is named for Thomas Bayes, an
eighteenth century mathematician.

In its most basic form, if we know P(B | A),

we can apply Bayes’ Law to determine P(A | B)

P(B|A) P(A|B)
for example …
09/26/2025 Towson University - J. Jung 42
 Bayes’ Law 1
PA and B  PA and B 
PA | B   , and PB | A 
PB  PA
So that given the Multiplica tion Rule, we have :
PA and B  PB | APA PA | B PB 
We can express either one of the conditiona l probabilit ies
in terms of the other one :
PB | APA PA | B PB 
PA | B   , or PB | A 
PB  PA

09/26/2025 Towson University - J. Jung 43

 Bayes’ Law 2
The marginal probabilit ies can be expressed as :
  
PB PB | APA P B | AC P AC ,
PA PA | B PB  P A | B P B . C C

Combining the expression for

conditiona l and marginal probabilit ies :
P B | AP A
PA | B   , or
PB | APA P B | A P A C C
  
P A | B P B 
PB | A  .
PA | B PB  P A | B P B
C C
  
09/26/2025 Towson University - J. Jung 44
 Bayes Law 3
PB | APA
PA | B  

PB | APA P B | AC P AC  

P(B) = P(B|A)P(A) +
First selection Second selection

P(B|Ac)P(Ac)
) P(A and B)
P(B|A

P(A) P( Bc
|A ) P(A and Bc)

P(Bc) = P(Bc|A)P(A)
c)
P( Ac P(B|A P(Ac and B)

+ P(Bc|Ac)P(Ac)
)
P( Bc|
A c P(Ac and Bc)

09/26/2025 Towson University - J. Jung 6.45

 Bayes Law 3

B Bc Total
A P(A and B) P(A and Bc) P(A)

Ac P(Ac and B) P(Ac and Bc) P(Ac)

Total P(B) P(Bc) 1.00

09/26/2025 Towson University - J. Jung

6.46
Example 6.9 – Pay $500 for MBA prep??
•The Graduate Management Admission Test (GMAT) is a requirement for
all applicants of MBA programs.
•There are a variety of preparatory courses designed to help improve
GMAT scores, which range from 200 to 800.
•Suppose that a survey of MBA students reveals that among GMAT scorers
above 650, 52% took a preparatory course, whereas among GMAT scorers
of less than 650 only 23% took a preparatory course.
•An applicant to an MBA program has determined that he needs a score of
more than 650 to get into a certain MBA program, but he feels that his
probability of getting that high a score is quite low--10%.
•He is considering taking a preparatory course that cost $500.
•He is willing to do so only if his probability of achieving 650 or more
doubles. What should he do?

09/26/2025 Towson University - J. Jung 6.47

 Example 6.9 – Convert to Statistical Notation
Let A = GMAT score of 650 or more,
hence AC = GMAT score less than 650

Our student has determined the probability of getting

greater than 650 (without any prep course) as 10%, that
is:

P(A) = 0.10

It follows that P(AC) = 1 – 0.10 = 0.90

09/26/2025 Towson University - J. Jung 6.48
 Example 6.9 – Convert to Statistical Notation
•Let B represent the event “take the prep course” and thus, BC is
“do not take the prep course”
•From our survey information, we’re told that among GMAT
scorers above 650, 52% took a preparatory course, that is:
P(B | A) = .52
•(Probability of finding a student who took the prep course given
that they scored above 650…)
•But our student wants to know P(A | B), that is, what is the
probability of getting more than 650 given that a prep course is
taken?
•If this probability is > 20%, he will spend $500 on the prep
course.
09/26/2025 Towson University - J. Jung 6.49
 Example 6.9 – Convert to Statistical Notation
Among GMAT scorers of less than 650 only 23%
took a preparatory course. That is:
P(B |AC ) = .23
(Probability of finding a student who took the
prep course given that he or she scored less
than 650…)

09/26/2025 Towson University - J. Jung 6.50

 Example 6.9 – Convert to Statistical Notation
Conditional probabilities are
P(B | A) = .52
and
P(B |AC ) = .23

Again using the complement rule we find the following

conditional probabilities.
P(BC | A) = 1 -.52 = .48
and
P(BC | AC ) = 1 -.23 = .77
09/26/2025 Towson University - J. Jung 6.51
 Example 6.9 – Continued…
We are trying to determine P(A | B), perhaps the definition
of conditional probability from earlier will assist us…

We don’t know P(A and B) and we don’t know P(B). Hmm.

Perhaps if we construct a probability tree…

09/26/2025 Towson University - J. Jung 6.52

 Example 6.9 – Continued…
In order to go from
P(B | A) = 0.52 to P(A | B) = ??
we need to apply Bayes’ Law. Graphically:
Score ≥ 650 Prep Test

B|A .52 A and B 0.052

10
A . B C|A .4
8 A and BC 0.048 Now we just
need P(B) !

3
AC B|A .2
C
.90 AC and B 0.207

B C|A C .7 AC and BC 0.693

7

09/26/2025 Towson University - J. Jung 6.53

 Example 6.9 – Continued…
In order to go from
P(B | A) = 0.52 to P(A | B) = ??
we need to apply Bayes’ Law. Graphically:
Score ≥ 650 Prep Test

B|A .52 A and B 0.052

10 Marginal Prob.
A . B C|A .4
8 A and BC 0.048
P(B) = P(A and B) +
P(AC and B) = .259

3
AC B|A .2
C
.90 AC and B 0.207

B C|A C .7 AC and BC 0.693

7

09/26/2025 Towson University - J. Jung 6.54

 Example 6.9 – FYI
Thus,

The probability of scoring 650 or better doubles

to 20.1% when the prep course is taken.
Or Bayes Law directly:
PB | APA 0.52 * 0.10
PA | B    0.201
PB  0.259

09/26/2025 Towson University - J. Jung 6.55

 Bayesian Terminology…
The probabilities P(A) and P(AC) are called prior
probabilities because they are determined prior
to the decision about taking the preparatory
course.

The conditional probability P(A | B) is called a

posterior probability (or revised probability),
because the prior probability is revised after the
decision about taking the preparatory course.
09/26/2025 Towson University - J. Jung 6.56