4.2 (cont.

) Standard
Deviation of a Discrete
Random Variable

First center (expected

value)
Now - spread
 4.2 (cont.) Standard
Deviation of a Discrete
Random Variable

Measures how “spread out”

the random variable is
 Summarizing data and
probability

Data Random variable

Histogram Probability Histogram
measure of the measure of the
center: sample mean center: population
x mean m
measure of spread: measure of spread:
sample standard population standard
deviation s deviation s
 Example

x 0 100
p(x) 1/2 1/2
E(x) = 0(1/2) + 100(1/2) = 50

y 49 51
p(y) 1/2 1/2
E(y) = 49(1/2) + 51(1/2) = 50
 Variance

Variation
n

 (X i  X) 2
1805.703
s2 = i=1
= = 53.1089
n-1 34

The deviations of the outcomes from the

mean of the probability distribution
xi - µ Xi - X
s2 (sigma squared) is the variance of the
probability distribution
 Variance

Variation
n

 (X i  X) 2
1805.703
s2 = i=1
= = 53.1089
n-1 34

Variance of discrete random variable X

k
s 2
=  (x
i =1
i  m )  P( X = x i )
2
 Economic Profit X
Probability P
Scenario ($ Millions)
Great x1 10 P(X=x1) 0.20

Variation Good x2 5 P(X=x2) 0.40

OK x3 1 P(X=x3) 0.25
Lousy x4 -4 P(X=x4) 0.15
k
s2 =  i
( x  m
i =1
) 2
 P( X = x i )
Example 3.65 3.65 3.65
s2 = (x1-µ)2 · P(X=x1) + (x2-µ)2 · P(X=x2) +
3.65
(x3-µ)2 · P(X=x3) + (x4-µ)2 · P(X=x4)
= (10-3.65)2 · 0.20 + (5-3.65)2 · 0.40 +
(1-3.65)2 · 0.25 + (-4-3.65)2 · 0.15 =
19.3275
P. 207, Handout 4.1, P. 4
Standard Deviation: of
More Interest then the
Variance

The population standard deviation is the square root

of the population variance
s  s 
 Standard Deviation
Standard Standard Deviation (s) =

Deviation
Positive Square Root of the Variance

s = s2

s2 = 19.3275

s, or SD, is the standard deviation of the

probability distribution

s (or SD) = s 2

s (or SD) = 19.3275  4.40 ($ mil.)

Probability Histogram

Probability
.40
Good s = 4.40
.35
.30 OK
.25 Great
Lousy .20
.15
.10
.05

-4 -2 0 2 4 6 8 10 12
Profit

µ=3.65
 Finance and Investment
Interpretation

X = return on an investment (stock,

portfolio, etc.)
E(x) = m  expected return on this
investment
s is a measure of the risk of the
investment
 k
s 2
=  i
( x  E ( X )) 2
 P( X = xi )

Example
i =1

A basketball player shoots 3 free throws. P(make)

=P(miss)=0.5. Let X = number of free throws made.
x 0 1 2 3
1 3 3 1
p( x) E(X) 
8 8 8 8
Compute the variance:
s 2  (0  1.5) 2  18   (1  1.5) 2  83   (2  1.5) 2  83   (3  1.5) 2  81 
 2.25  18   .25  83   .25  83   2.25  18 
 .75.

s  s 
 .75  .866
 Expected Value of a Random Variable
Example: The probability model for a particular life insurance
policy is shown. Find the expected annual payout on a policy.

We expect that the insurance company will pay out $200 per policy
per year.
13
© 2010 Pearson Education
 Standard Deviation of a Random Variable

Example: The probability model for a particular life insurance

policy is shown. Find the standard deviation of the annual payout.

14
© 2010 Pearson Education
 68-95-99.7 Rule for
Random Variables

For random variables x whose probability

histograms are approximately mound-
shaped:
Pm  s  x  m  s  68
Pm  s  x  m  s  9
P(m 3s  x  m  3s  997
(m  s, m  s) (50-5, 50+5) (45, 55)
Pm  s  X  m  s  P(45  X  55)
=.048+.057+.066+.073+.078+.08+.078+.073+
.066+.057+.048=.724
Rules for E(X), Var(X) and SD(X):
adding a constant a

If X is a rv and a is Example: a = -1

a constant:

 E(X+a) = E(X)+a  E(X+a)=E(X-1)=E(X)-1

Rules for E(X), Var(X) and SD(X):
adding constant a (cont.)

Var(X+a) = Var(X) Example: a = -1

SD(X+a) = SD(X)
 Var(X+a)=Var(X-1)=Var(X)
 SD(X+a)=SD(X-1)=SD(X)
Economic Profit X Economic Profit X+2
Probability P Probability P
Scenario ($ Millions) Scenario ($ Millions)
Great x1 10 P(X=x1) 0.20 Great x1+2 10+2 P(X=x1) 0.20
Good x2 5 P(X=x2) 0.40 Good x2+2 5+2 P(X=x2) 0.40
OK x3 1 P(X=x3) 0.25 OK x3+2 1+2 P(X=x3) 0.25
Lousy x4 -4 P(X=x4) 0.15 Lousy x4+2 -4+2 P(X=x4) 0.15

E(x + a) = E(x) + a; SD(x + a)=SD(x); let a = 2

Probability s = 4.40 Probability s = 4.40

0.5 0.5
0.4 0.4
0.3 0.3
0.2 0.2
0.1 0.1
0 0
-4 -2 0 2 4 6 8 10 12 14 -4 -2 0 2 4 6 8 10 12 14

m3.65
Profit m5.65
Profit
 New Expected Value

Long (UNC-CH) way: (compute from

“scratch”)
E(x+2)=12(.20)+7(.40)+3(.25)+(-2)(.15)
= 5.65
Smart (NCSU) way:
a=2; E(x+2) =E(x) + 2 = 3.65 + 2 = 5.65
 New Variance and SD
Long (UNC-CH) way: (compute from
“scratch”)
Var(X+2)=(12-5.65)2(0.20)+…
+(-2+5.65)2(0.15) = 19.3275
SD(X+2) = √19.3275 = 4.40

Smart (NCSU) way:

Var(X+2) = Var(X) = 19.3275
SD(X+2) = SD(X) = 4.40
 Rules for E(X), Var(X) and SD(X):
multiplying by constant b

E(bX)=b E(X)  Example: b =-1

 E(bX)=E(-X)=-E(X)

 Var(b X) = b2Var(X)
 Var(bX)=Var(-1X)=
=(-1)2Var(X)=Var(X)
 SD(bX)= |b|SD(X)
 SD(bX)=SD(-1X)=
=|-1|SD(X)=SD(X)
Expected Value and SD of Linear
Transformation a + bx
Let X=number of repairs a new computer needs each year.
Suppose E(X)= 0.20 and SD(X)=0.55
The service contract for the computer offers unlimited repairs
for $100 per year plus a $25 service charge for each repair.
What are the mean and standard deviation of the yearly cost of
the service contract?
Cost = $100 + $25X
E(cost) = E($100+$25X)=$100+$25E(X)=$100+$25*0.20=
= $100+$5=$105
SD(cost)=SD($100+$25X)=SD($25X)=$25*SD(X)=$25*0.55=
=$13.75
Addition and Subtraction Rules
for Random Variables
 E(X+Y) = E(X) + E(Y);
 E(X-Y) = E(X) - E(Y)

 When X and Y are independent random variables:

1. Var(X+Y)=Var(X)+Var(Y)
2. SD(X+Y)= Var ( X )  Var (Y )
SD’s do not add:
SD(X+Y)≠ SD(X)+SD(Y)
3. Var(X−Y)=Var(X)+Var(Y)
4. SD(X −Y)= Var ( X )  Var (Y )
SD’s do not subtract:
SD(X−Y)≠ SD(X)−SD(Y)
SD(X−Y)≠ SD(X)+SD(Y)
 Motivation for
Var(X-Y)=Var(X)+Var(Y)

 Let X=amount automatic dispensing machine

puts into your 16 oz drink (say at McD’s)
 A thirsty, broke friend shows up.
Let Y=amount you pour into friend’s 8 oz cup
 Let Z = amount left in your cup; Z = ?
 Z = X-Y
 Var(Z) = Var(X-Y) = Var(X)
Has 2 + Var(Y)
components
 Example: rv’s NOT independent
 X=number of hours a randomly selected student from our
class slept between noon yesterday and noon today.
 Y=number of hours the same randomly selected student
from our class was awake between noon yesterday and
noon today. Y = 24 – X.
 What are the expected value and variance of the total hours
that a student is asleep and awake between noon yesterday
and noon today?
 Total hours that a student is asleep and awake between
noon yesterday and noon today = X+Y
 E(X+Y) = E(X+24-X) = E(24) = 24
 Var(X+Y) = Var(X+24-X) = Var(24) = 0.
 We don't add Var(X) and Var(Y) since X and Y are not
independent.
 Pythagorean Theorem of Statistics
for Independent X and Y

Var(X+Y)
c2

Var(X)
a2 c
a SD(X+Y)
SD(X)

a+b≠c
b SD(Y) SD(X)+SD(Y) ≠SD(X+Y)
a2+b2=c2
Var(X) +Var(Y) =Var(X+Y)
b2
Var(Y)
 Pythagorean Theorem of Statistics
for Independent X and Y

32 + 42 = 52
Var(X)+Var(Y)=Var(X+Y)

25=9+16
Var(X) Var(X+Y)
9 5
3 SD(X+Y)
SD(X)

3+4≠5
4 SD(Y) SD(X)+SD(Y) ≠SD(X+Y)

16
Var(Y)
 Example: meal plans
Regular plan: X = daily amount spent
E(X) = $13.50, SD(X) = $7
Expected value and stan. dev. of total spent in
2 consecutive days?
E(X 1+X2)=E(X 1 )+E(X2)=$13.50+$13.50=$27
SD(X + X ) ≠ SD(X )+SD(X ) = $7+$7=$14
1 2 1 2

SD( X 1  X 2 )  Var ( X 1  X 2 )  Var ( X 1 )  Var ( X 2 )

 ($7)  ($7)  $ 49  $ 49  $ 98  $9.90

2 2 2 2 2
 Example: meal plans (cont.)
Jumbo plan for football players Y=daily
amount spent
E(Y) = $24.75, SD(Y) = $9.50
Amount by which football player’s spending
exceeds regular student spending is Y-X
E(Y-X)=E(Y)–E(X)=$24.75-$13.50=$11.25
SD(Y ̶ X) ≠ SD(Y) ̶ SD(X) = $9.50 ̶ $7=$2.50

SD(Y  X )  Var (Y  X )  Var (Y )  Var ( X )

 ($9.50)  ($7)  $ 90.25  $ 49  $ 139.25  $11.80
2 2 2 2 2
For random variables, X+X≠2X
 Let X be the annual payout on a life insurance policy.
From mortality tables E(X)=$200 and SD(X)=$3,867.
1) If the payout amounts are doubled, what are the new
expected value and standard deviation?
The risk to the
 Double payout is 2X. E(2X)=2E(X)=2*$200=$400
insurance co. when
 SD(2X)=2SD(X)=2*$3,867=$7,734 doubling the payout
2) Suppose insurance policies are sold to 2 (2X)
people.
is notThe
the same
annual payouts are X1 and X2. Assume the as 2
thepeople
risk when
behave independently. What are the expected value to 2
selling policies
and standard deviation of the total payout?
people.
 E(X1 + X2)=E(X1) + E(X2) = $200 + $200 = $400
SD(X1 + X2 )= Var ( X1  X 2 )  Var ( X1 )  Var ( X 2 )
 (3867)2  (3867)2  14,953,689  14,953,689
 29,907,378  $5, 468.76