Lesson 4

Discrete Probability
Distributions

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 1
 Learning Objectives
In this chapter, you learn:
◼ The properties of a probability distribution

◼ To compute the expected value and variance of a

probability distribution
◼ To calculate the covariance and understand its use
in finance
◼ To compute probabilities from binomial,
hypergeometric, and Poisson distributions
◼ To use the binomial, hypergeometric, and Poisson
distributions to solve business problems

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 2
 Definitions

◼ Discrete variables produce outcomes that

come from a counting process (e.g. number of
classes you are taking).

◼ Continuous variables produce outcomes that

come from a measurement (e.g. your annual
salary, or your weight).

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 3
 Types Of Variables

Types Of
Variables

Ch. 5 Discrete Continuous Ch. 6

Variable Variable

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 4
 Discrete Variables
◼ Can only assume a countable number of values
Examples:

◼ Roll a die twice

Let X be the number of times 4 occurs
(then X could be 0, 1, or 2 times)

◼ Toss a coin 5 times.

Let X be the number of heads
(then X = 0, 1, 2, 3, 4, or 5)

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 5
 Probability Distribution For A
Discrete Variable
◼ A probability distribution for a discrete variable is a
mutually exclusive listing of all possible numerical outcomes
for that variable and a probability of occurrence associated
with each outcome.
Interruptions Per Day In Probability
Computer Network
0 0.35
1 0.25
2 0.20
3 0.10
4 0.05
5 0.05
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 6
Probability Distributions Are
Often Represented Graphically
P(X)

0.4

0.3

0.2

0.1

0 1 2 3 4 5 X

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 7
Discrete Variables Expected Value (Measuring
Center)
◼ Expected Value (or mean) of a discrete
variable (Weighted Average)
N
 = E(X) =  xi P ( X = xi )
i =1

Interruptions Per Day In Probability

Computer Network (xi) P(X = xi) xiP(X = xi)
0 0.35 (0)(0.35) = 0.00
1 0.25 (1)(0.25) = 0.25
2 0.20 (2)(0.20) = 0.40
3 0.10 (3)(0.10) = 0.30
4 0.05 (4)(0.05) = 0.20
5 0.05 (5)(0.05) = 0.25
1.00 μ = E(X) = 1.40

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 8
 Discrete Variables:
Measuring Dispersion
◼ Variance of a discrete variable
N
σ 2 =  [x i − E(X)]2 P(X = x i )
i =1

◼ Standard Deviation of a discrete variable

N
σ = σ2 =  i
[x
i =1
− E(X)]2
P(X = x i )

where:
E(X) = Expected value of the discrete variable X
xi = the ith outcome of X
P(X=xi) = Probability of the ith occurrence of X

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 9
Discrete Variables: Measuring Dispersion
(continued)
N
σ=  [x
i =1
i − E(X)] P(X = x i )
2

Interruptions Per
Day In Computer Probability
Network (xi) P(X = xi) [xi – E(X)]2 [xi – E(X)]2P(X = xi)
0 0.35 (0 – 1.4)2 = 1.96 (1.96)(0.35) = 0.686
1 0.25 (1 – 1.4)2 = 0.16 (0.16)(0.25) = 0.040
2 0.20 (2 – 1.4)2 = 0.36 (0.36)(0.20) = 0.072
3 0.10 (3 – 1.4)2 = 2.56 (2.56)(0.10) = 0.256
4 0.05 (4 – 1.4)2 = 6.76 (6.76)(0.05) = 0.338
5 0.05 (5 – 1.4)2 = 12.96 (12.96)(0.05) = 0.648
σ2 = 2.04, σ = 1.4283

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 10
 Covariance

◼ The covariance measures the strength of the

linear relationship between two discrete
variables X and Y.

◼ A positive covariance indicates a positive

relationship.

◼ A negative covariance indicates a negative

relationship.

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 11
 The Covariance Formula

◼ The covariance formula:

N
σ XY =  [ xi − E ( X )][( yi − E (Y )] P ( X = xi , Y = yi )
i =1

where: X = discrete variable X

xi = the ith outcome of X
Y = discrete variable Y
yi = the ith outcome of Y
P(X=xi,Y=yi) = probability of occurrence of the
ith outcome of X and the ith outcome of Y

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 12
 Investment Returns
The Mean
Consider the return per $1000 for two types of
investments.

Investment
Economic Condition
Prob. Passive Fund X Aggressive Fund Y

0.2 Recession - $25 - $200

0.5 Stable Economy + $50 + $60

0.3 Expanding Economy + $100 + $350

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 13
Investment Returns
The Mean

E(X) = μX = (-25)(.2) +(50)(.5) + (100)(.3) = 50

E(Y) = μY = (-200)(.2) +(60)(.5) + (350)(.3) = 95

Interpretation: Fund X is averaging a $50.00 return

and fund Y is averaging a $95.00 return per $1000
invested.

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 14
Investment Returns
Standard Deviation

σ X = (-25 − 50) 2 (.2) + (50 − 50) 2 (.5) + (100 − 50) 2 (.3)

= 43.30

σ Y = (-200 − 95) 2 (.2) + (60 − 95) 2 (.5) + (350 − 95) 2 (.3)

= 193.71

Interpretation: Even though fund Y has a higher

average return, it is subject to much more variability
and the probability of loss is higher.

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 15
Investment Returns
Covariance

σ XY = (-25 − 50)(-200 − 95)(.2) + (50 − 50)(60 − 95)(.5)

+ (100 − 50)(350 − 95)(.3)
= 8,250

Interpretation: Since the covariance is large and

positive, there is a positive relationship between the
two investment funds, meaning that they will likely
rise and fall together.

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 16
 The Sum of
Two Variables
◼ Expected Value of the sum of two variables:

E(X + Y) = E( X) + E( Y)

◼ Variance of the sum of two variables:

Var(X + Y) = σ 2X+ Y = σ 2X + σ 2Y + 2σ XY

◼ Standard deviation of the sum of two variables:

σ X+ Y = σ 2X+ Y
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 17
 Portfolio Expected Return and
Expected Risk

◼ Investment portfolios usually contain several

different funds (variables)

◼ The expected return and standard deviation of

two funds together can now be calculated.

◼ Investment Objective: Maximize return (mean)

while minimizing risk (standard deviation).

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 18
 Portfolio Expected Return
and Portfolio Risk

◼ Portfolio expected return (weighted average

return):
E(P) = w E( X) + (1− w )E( Y)

◼ Portfolio risk (weighted variability)

σP = w 2σ 2X + (1 − w )2 σ 2Y + 2w(1- w)σ XY

Where w = proportion of portfolio value in asset X

(1 - w) = proportion of portfolio value in asset Y

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 19
 Portfolio Example
Investment X: μX = 50 σX = 43.30
Investment Y: μY = 95 σY = 193.21
σXY = 8250

Suppose 40% of the portfolio is in Investment X and

60% is in Investment Y:
E(P) = 0.4 (50) + (0.6)(95) = 77

σ P = (0.4) 2 (43.30) 2 + (0.6) 2 (193.71) 2 + 2(0.4)(0.6)(8,250)

= 133.30

The portfolio return and portfolio variability are between the values
for investments X and Y considered individually
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 20
 Probability Distributions
Probability
Distributions

Ch. 5 Discrete Continuous Ch. 6

Probability Probability
Distributions Distributions

Binomial Normal

Poisson Uniform

Hypergeometric Exponential

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 21
 Binomial Probability Distribution
◼ A fixed number of observations, n
◼ e.g., 15 tosses of a coin; ten light bulbs taken from a warehouse
◼ Each observation is categorized as to whether or not the
“event of interest” occurred
◼ e.g., head or tail in each toss of a coin; defective or not defective
light bulb
◼ Since these two categories are mutually exclusive and
collectively exhaustive
◼ When the probability of the event of interest is represented as π,
then the probability of the event of interest not occurring is 1 - π
◼ Constant probability for the event of interest occurring
(π) for each observation
◼ Probability of getting a tail is the same each time we toss the
coin
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 22
 Binomial Probability Distribution
(continued)

◼ Observations are independent

◼ The outcome of one observation does not affect the
outcome of the other
◼ Two sampling methods deliver independence
◼ Infinite population without replacement
◼ Finite population with replacement

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 23
 Possible Applications for the
Binomial Distribution

◼ A manufacturing plant labels items as

either defective or acceptable
◼ A firm bidding for contracts will either get a
contract or not
◼ A marketing research firm receives survey
responses of “yes I will buy” or “no I will
not”
◼ New job applicants either accept the offer
or reject it
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 24
 The Binomial Distribution
Counting Techniques

◼ Suppose the event of interest is obtaining heads on the

toss of a fair coin. You are to toss the coin three times.
In how many ways can you get two heads?

◼ Possible ways: HHT, HTH, THH, so there are three

ways you can getting two heads.

◼ This situation is fairly simple. We need to be able to

count the number of ways for more complicated
situations.

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 25
 Counting Techniques
Rule of Combinations

◼ The number of combinations of selecting x

objects out of n objects is

n!
n Cx =
x! (n − x)!
where:
n! =(n)(n - 1)(n - 2) . . . (2)(1)
x! = (X)(X - 1)(X - 2) . . . (2)(1)
0! = 1 (by definition)

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 26
 Counting Techniques
Rule of Combinations

◼ How many possible 3 scoop combinations could you

create at an ice cream parlor if you have 31 flavors to
select from and no flavor can be used more than once
in the 3 scoops?
◼ The total choices is n = 31, and we select X = 3.

31! 31! 31 • 30 • 29 • 28!

31 C3 = = = = 31 • 5 • 29 = 4,495
3!(31 − 3)! 3!28! 3 • 2 • 1 • 28!

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 27
 Binomial Distribution Formula
n! x n−x
P(X=x |n,π) = π (1-π)
x! (n − x )!

P(X=x|n,π) = probability of x events of interest

in n trials, with the probability of an
“event of interest” being π for Example: Flip a coin four
each trial times, let x = # heads:
n=4
x = number of “events of interest” in sample,
(x = 0, 1, 2, ..., n) π = 0.5

n = sample size (number of trials 1 - π = (1 - 0.5) = 0.5

or observations) X = 0, 1, 2, 3, 4
π = probability of “event of interest”
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 28
Example:
Calculating a Binomial Probability
What is the probability of one success in five
observations if the probability of an event of
interest is 0.1?
x = 1, n = 5, and π = 0.1

n!
P(X = 1 | 5,0.1) =  x (1 −  ) n − x
x! (n − x)!
5!
= (0.1)1 (1 − 0.1)5−1
1!(5 − 1)!
= (5)(0.1)(0.9) 4
= 0.32805

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 29
The Binomial Distribution
Example
Suppose the probability of purchasing a defective
computer is 0.02. What is the probability of
purchasing 2 defective computers in a group of 10?
x = 2, n = 10, and π = 0.02

n!
P(X = 2 | 10, 0.02) =  x (1 −  ) n − x
x! (n − x)!
10!
= (.02) 2 (1 − .02)10− 2
2!(10 − 2)!
= (45)(.0004)(.8508)
= .01531

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 30
 The Binomial Distribution
Shape

◼ The shape of the

P(X=x|5, 0.1)
binomial distribution .6
depends on the values .4
of π and n .2
◼ Here, n = 5 and π = .1 0
0 1 2 3 4 5 x

P(X=x|5, 0.5)
.6
.4
◼ Here, n = 5 and π = .5 .2
0
0 1 2 3 4 5 x

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 31
 The Binomial Distribution Using
Binomial Tables (Available On Line)
n = 10
x … π=.20 π=.25 π=.30 π=.35 π=.40 π=.45 π=.50
0 … 0.1074 0.0563 0.0282 0.0135 0.0060 0.0025 0.0010 10
1 … 0.2684 0.1877 0.1211 0.0725 0.0403 0.0207 0.0098 9
2 … 0.3020 0.2816 0.2335 0.1757 0.1209 0.0763 0.0439 8
3 … 0.2013 0.2503 0.2668 0.2522 0.2150 0.1665 0.1172 7
4 … 0.0881 0.1460 0.2001 0.2377 0.2508 0.2384 0.2051 6
5 … 0.0264 0.0584 0.1029 0.1536 0.2007 0.2340 0.2461 5
6 … 0.0055 0.0162 0.0368 0.0689 0.1115 0.1596 0.2051 4
7 … 0.0008 0.0031 0.0090 0.0212 0.0425 0.0746 0.1172 3
8 … 0.0001 0.0004 0.0014 0.0043 0.0106 0.0229 0.0439 2
9 … 0.0000 0.0000 0.0001 0.0005 0.0016 0.0042 0.0098 1
10 … 0.0000 0.0000 0.0000 0.0000 0.0001 0.0003 0.0010 0

… π=.80 π=.75 π=.70 π=.65 π=.60 π=.55 π=.50 x

Examples:
n = 10, π = 0.35, x = 3: P(X = 3|10, 0.35) = 0.2522
n = 10, π = 0.75, x = 8: P(X = 8|10, 0.75) = 0.2816
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 32
Binomial Distribution
Characteristics

Mean
μ = E(X) = n
◼

◼ Variance and Standard Deviation

σ = n (1 -  )
2

σ = n (1 -  )
Where n = sample size
π = probability of the event of interest for any trial
(1 – π) = probability of no event of interest for any trial

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 33
 The Binomial Distribution
Characteristics

Examples
P(X=x|5, 0.1)
μ = nπ = (5)(.1) = 0.5 .6
.4
σ = nπ (1 - π ) = (5)(.1)(1− .1) .2
0
= 0.6708 0 1 2 3 4 5 x

P(X=x|5, 0.5)
μ = nπ = (5)(.5) = 2.5 .6
.4
σ = nπ (1 - π ) = (5)(.5)(1− .5) .2
0
= 1.118 0 1 2 3 4 5 x

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 34
Both Excel & Minitab Can Be Used To Calculate
The Binomial Distribution

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 35
 The Poisson Distribution
Definitions

◼ You use the Poisson distribution when you

are interested in the number of times an event
occurs in a given area of opportunity.
◼ An area of opportunity is a continuous unit or
interval of time, volume, or such area in which
more than one occurrence of an event can
occur.
◼ The number of scratches in a car’s paint
◼ The number of mosquito bites on a person
◼ The number of computer crashes in a day

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 36
 The Poisson Distribution
◼ Apply the Poisson Distribution when:
◼ You wish to count the number of times an event
occurs in a given area of opportunity
◼ The probability that an event occurs in one area of
opportunity is the same for all areas of opportunity
◼ The number of events that occur in one area of
opportunity is independent of the number of events
that occur in the other areas of opportunity
◼ The probability that two or more events occur in an
area of opportunity approaches zero as the area of
opportunity becomes smaller
◼ The average number of events per unit is  (lambda)

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 37
 Poisson Distribution Formula

−
e  x
P( X = x |  ) =
x!
where:
x = number of events in an area of opportunity
 = expected number of events
e = base of the natural logarithm system (2.71828...)

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 38
Poisson Distribution
Characteristics

Mean
μ=λ
◼

◼ Variance and Standard Deviation

σ2 = λ
σ= λ
where  = expected number of events

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 39
 Using Poisson Tables
(Available On Line)


X 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90

0 0.9048 0.8187 0.7408 0.6703 0.6065 0.5488 0.4966 0.4493 0.4066

1 0.0905 0.1637 0.2222 0.2681 0.3033 0.3293 0.3476 0.3595 0.3659
2 0.0045 0.0164 0.0333 0.0536 0.0758 0.0988 0.1217 0.1438 0.1647
3 0.0002 0.0011 0.0033 0.0072 0.0126 0.0198 0.0284 0.0383 0.0494
4 0.0000 0.0001 0.0003 0.0007 0.0016 0.0030 0.0050 0.0077 0.0111
5 0.0000 0.0000 0.0000 0.0001 0.0002 0.0004 0.0007 0.0012 0.0020
6 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0001 0.0002 0.0003
7 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Example: Find P(X = 2 |  = 0.50)

e − λ λ x e −0.50(0.50) 2
P(X = 2 | 0.50) = = = 0.0758
x! 2!

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 40
Excel & Minitab Can Be Used For The
Poisson Distribution

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 41
 Graph of Poisson Probabilities

Graphically:
 = 0.50
=
X 0.50
0 0.6065
1 0.3033
2 0.0758
3 0.0126
4 0.0016
5 0.0002
6 0.0000
P(X = 2 | =0.50) = 0.0758
7 0.0000

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 42
 Poisson Distribution Shape

◼ The shape of the Poisson Distribution

depends on the parameter  :
 = 0.50  = 3.00

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 43
The Hypergeometric Distribution

◼ The binomial distribution is applicable when

selecting from a finite population with
replacement or from an infinite population
without replacement.

◼ The hypergeometric distribution is applicable

when selecting from a finite population without
replacement.

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 44
The Hypergeometric Distribution

◼ “n” trials in a sample taken from a finite

population of size N
◼ Sample taken without replacement
◼ Outcomes of trials are dependent
◼ Concerned with finding the probability of “X”
items of interest in the sample where there are
“E” items of interest in the population

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 45
Hypergeometric Distribution
Formula
 E  N − E 
  
[ E Cx ][ N − E Cn − x ]  x  n − x 
P(X = x | n, N, E) = =
N Cn  N
 
n 

Where
N = population size
E = number of items of interest in the population
N – E = number of events not of interest in the population
n = sample size
x = number of items of interest in the sample
n – x = number of events not of interest in the sample

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 46
 Properties of the
Hypergeometric Distribution

◼ The mean of the hypergeometric distribution is

nE
μ = E(X) =
N
◼ The standard deviation is
nE(N - E) N-n
σ= 2

N N -1

N-n
Where is called the “Finite Population Correction Factor”
N -1
from sampling without replacement from a
finite population
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 47
 Using the
Hypergeometric Distribution
■ Example: 3 different computers are checked out from
10 in the department. 4 of the 10 computers have illegal
software loaded. What is the probability that 2 of the 3
selected computers have illegal software loaded?
N = 10 n=3
A=4 x=2

 E  N − E   4  6 
     
−
P(X = 2 | 3,10,4) =    =  2  1  = (6)(6) = 0.3
X n X
 N  10  120
   
n  3 

The probability that 2 of the 3 selected computers have illegal

software loaded is 0.30, or 30%.
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 48
Excel & Minitab Can Be Used For The
Hypergeometric Distribution

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 49
 Chapter 5 On Line Topic

◼ Using the Poisson distribution to approximate

the binomial distribution is an on line topic.

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 50
 Chapter Summary

In this chapter we discussed

◼ The probability distribution of a discrete variable

◼ The covariance and its application in finance
◼ The Binomial distribution
◼ The Poisson distribution
◼ The Hypergeometric distribution

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 51
Chapter 5
The Poisson
Approximation to the
Binomial Distribution --
On Line Topic

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 52
 Learning Objective

◼ To learn to apply the poisson distribution to

approximate binomial probabilities

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 53
 Poisson Approximation to the
Binomial Distribution

◼ The binomial distribution is a discrete

distribution, but the normal is continuous
◼ To use the normal to approximate the binomial,
accuracy is improved if you use a correction for
continuity adjustment
◼ Example:
◼ X is discrete in a binomial distribution, so
P(X = 4 |n,π) can be approximated with a continuous
normal distribution by finding
P(3.5 < X < 4.5)

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 54
 Poisson Approximation to the
Binomial Distribution
(continued)

◼ The closer π is to 0.5, the better the Poisson

Approximation to the binomial
◼ The larger the sample size n, the better the
Poisson Approximation to the binomial
◼ General rule:
◼ The normal distribution can be used to approximate
the binomial distribution if

nπ ≥ 5
and
n(1 – π) ≥ 5
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 55
 Poisson Approximation to the
Binomial Distribution
(continued)

◼ The mean and standard deviation of the

binomial distribution are
μ = nπ
σ = nπ (1 − π )

◼ Transform binomial to normal using the formula:

X−μ X − nπ
Z= =
σ nπ (1 − π )

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 56
 Using the Poisson Approximation
to the Binomial Distribution
◼ If n = 1000 and π = 0.2, what is P(X ≤ 180)?
◼ Approximate P(X ≤ 180 | 1000, 0.2) using a continuity
correction adjustment:
P(X ≤ 180.5)
◼ Transform to standardized normal:
X − nπ 180.5 − (1000)(0.2)
Z= = = −1.54
nπ (1 − π ) (1000)(0.2)(1 − 0.2)

◼ So P(Z ≤ -1.54) = 0.0618

180.5 200 X
-1.54 0 Z
Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 57
 Summary

◼ Found approximations to binomial probabilities

by using the normal distribution.

Copyright © 2015, 2012, 2009 Pearson Education, Inc. Chapter 05, Slide 58