Expected Value
One of the most important probabilistic concepts in statistics is the
expected value. The expected value of the discrete random variable X,
denoted by E(X) or simply µ, is a weighted average of the possible values
of X.
Expected value is a key concept in economics, finance, and many other subjects.
In statistics and probability analysis, the expected value is calculated by
multiplying each of the possible outcomes by the likelihood each outcome
will occur and then summing all of those values.
❑
E ( X ) =∑ x·P( X =x)
all x
The EV of a random variable gives a measure of the center of the
distribution of the variable. Essentially, the EV is the long-term average
value of the variable. The EV is also known as expectation, the mean or
the first moment.
Example of Expected Value (EV)
To calculate the EV for a single discrete random variable, you must
multiply the value of the variable by the probability of that value occurring.
Take, for example, a normal six-sided die. Once you roll the die, it has an
equal one-sixth chance of landing on one, two, three, four, five, or six.
Given this information, the calculation is straightforward:
1. Let X represent the outcome of a roll of a fair six-sided die.
More specifically, X will be the number of pips showing on the
top face of the die after the toss. The possible values for X are
1, 2, 3, 4, 5, and 6, all of which are equally likely with a
probability of 1/6. The expectation of X is
If you were to roll a six-sided die an infinite amount of times,
you see the average value equals 3.5.
2. The roulette game consists of a small ball and a wheel with 38
numbered pockets around the edge. As the wheel is spun, the
ball bounces around randomly until it settles down in one of the
pockets. Suppose random variable X represents the (monetary)
outcome of a $1 bet on a single number ("straight up" bet). If
the bet wins (which happens with probability 1/38 in American
roulette), the payoff is $35; otherwise the player loses the bet.
The expected profit from such a bet will be
3. Suppose Linda is working in an insurance company and she
sells a 100,000 one-year term insurance policy at an annual
premium of 29,000. Actuarial tables show that the probability of
death during the next year for Linda’s customer whose age,
sex, health, etc. is 0.001. What is the expected gain (amount of
money made by the company) for a policy of this type?
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The expected Value of a Function of a Random Variable
The expected Value of a Function of a Random Variable can be computed as follows.
Let X be a discrete random variable with probability distribution given by
x x1 x2 · ·· xn
f(x) = P(X = x) f(x1) f(x2) · ·· f(xn)
The expected value of g(X), a function of the discrete random variable X, is
n
E( g ( X ))=∑ g ( x 1 ) f ( x 1 ) .
i=1
Example #
A used car dealer finds that in any day, the probability of selling no car is 0.4, one car is 0.2, two
cars is 0.15, 3 cars is 0.10, 4 cars is 0.08, five cars is 0.06, and six cars is 0.01. Let X = number of
cars sold and let Y = g(X) = 500 + 1,500X representing the salesman’s daily earning fins the
salesman’s expected daily earnings.
Solution:
Table
Space
Table
Space
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Variance and standard Deviation of a Random Variable
The mean µ of the random variable X provides us with a measure of the central location of the
distribution of X, but it does not give us information on how . We need a measure that indicates
whether the values of X are clustered about µ or widely scattered from µ.
We have seen that the mean of a random variable X is a measure of the central location of the
distribution of X. If we are summarizing features of the distribution of X, it is clear that location
is not the only relevant feature. The second most important feature is the spread of the
distribution. We need a measure that indicates whether the values of X are clustered about µ or
widely scattered from µ.
The variance of a discrete random variable X measures the spread, or
variability, of the distribution, and is defined by
2
σ 2=Var ( X )=∑ [ x 2 · P(X =x) ]−[ E(X ) ]
Example #
Five balls numbered 0, 2, 4, 6, and 8 are placed in a bag. After the balls are mixed, one ball is
picked and its number is noted, then it is replaced in the bag. If the experiment is repeated
many times, find the variance and the standard deviation of the numbers on the balls.
Solution:
Table
Then solve
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Example #
The probability that 0, 1, 2, 3, or 4 people will be placed on hold when they call a radio talk show
is shown in the distribution. Determine the variance and the standard deviation for the data.
The radio station has four phone lines. When all lines are full, a busy signal is heard.
x 0 1 2 3 4
P(X = x) 0.17 0.34 0.24 0.20 0.05
Should the radio station consider getting more phone lines installed?
Solution:
Solve expected
Variance
Standard deviation
A company makes electronic gadgets. One out of every 50 gadgets is faulty, but the company
doesn't know which ones are faulty until a buyer complains. Suppose the company makes a $3
profit on the sale of any working gadget, but suffers a loss of $80 for every faulty gadget
because they have to repair the unit. Check whether the company can expect a profit in the long
term.
Empirical Rule for a Discrete Random Variable
The empirical rule, also referred to as the three-sigma rule or 68-95-99.7 rule, is a statistical rule
which states that for a normal distribution, almost all observed data will fall within three
standard deviations (denoted by σ) of the mean or average (denoted by µ).
For a discrete random variable X with expected value µ and standard deviation 𝜎, the following
probability statements can be made:
P ( µ−σ < X< µ+ σ ) ≃ 0.68
P ( µ−2 σ < X < µ+2 σ ) ≃0.95
P ( µ−3 σ < X < µ+3 σ ) ≃ 1
This rule applies to probability distribution that is mound-shaped and symmetric.
Example 1
Let's assume a population of animals in a zoo is known to be normally distributed. Each animal
lives to be 13.1 years old on average (mean), and the standard deviation of the lifespan is 1.5
years. If someone wants to know the probability that an animal will live longer than 14.6 years,
they could use the empirical rule.
The person solving this problem needs to calculate the total probability of the animal living 14.6
years or longer. The empirical rule shows that 68% of the distribution lies within one standard
deviation, in this case, from 11.6 to 14.6 years. Thus, the remaining 32% of the distribution lies
outside this range. Half lies above 14.6 and half lies below 11.6. So, the probability of the animal
living for more than 14.6 is 16% (calculated as 32% divided by two).
Example 2
An animal in the zoo lives to an average of 10 years of age, with a standard deviation of 1.4
years. Assume the zookeeper attempts to figure out the probability of an animal living for more
than 7.2 years.
EXAMPLE 1: (FROM THIS VID) (42) Statistics - How to use the Empirical Rule - YouTube
Grades on a history exam follow a normal distribution with a mean of 78 and a standard
deviation of 6.
Find the range around the mean that includes 95% or the grades.
EXAMPLE 2: (FROM THIS VID) (42) Statistics - How to use the Empirical Rule - YouTube
The heights of women follow a bell-shaped distribution with a mean of 160 cm and a standard
deviation of 7.5 cm.
What is the approximate percentage of woman between 137.5 cm and 182.5 cm?
Chebyshev’s Rule for a Discrete Random Variable
The Empirical Rule does not apply to all data sets, only to those that are bell-shaped. A result
that applies to every data set is known as Chebyshev’s Theorem.
The Chebyshev’s rule gives the proportion of data that is within k standard deviations of the
mean. (where k > 1)
For a discrete random variable X with expected value µ and standard deviation 𝜎, the following
probability statements can be made:
P ( µ−σ < X< µ+ σ ) ≃ 0.68
P ( µ−2 σ < X < µ+2 σ ) ≃0.95
P ( µ−3 σ < X < µ+3 σ ) ≃ 1
This rule applies to probability distribution that is mound-shaped and symmetric.
Example 3
74 48 37 30 28 26
65 48 37 30 28 26
57 40 36 30 28 24
50 35 36 30 27 23
49 35 32 29 26 19
What proportion of the data is within 2 standard deviations of the mean?
Example 4
The average price of a new car is $36,000, with a standard deviation of $4,100. What is the
minimum percentage of cars that should sell between $22,000 and $50,000?
Empirical Rule Definition (investopedia.com)
Example 3&4
The average weight of individuals in city XYZ is 170 lbs with a standard deviation of 10. What is
the minimum percentage of individuals with a weight between 145 lbs and 195 lbs in the city? If
the city contains 200,000 residents, what is the minimum amount of individuals with a weight
between 140 lbs and 200 lbs?
(42) Chebyshev's Theorem - YouTube
