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stat2024-9

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yd47d8hkjc
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Section 5.

6 Jointly Distributed
Continuous Random Variables (1 of 2)
• Let X 1 , X 2 , . . ., X k be continuous random variables

• Their joint cumulative distribution function,


F ( x1 , x2 , . . ., xk )
defines the probability that simultaneously X 1 is less than x1 ,
X 2 is less than x2 , and so on; that is
F ( x1 , x2 , . . ., xk ) = P ( X 1  x1 X 2  x2  X k  xk )

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 59


Section 5.6 Jointly Distributed
Continuous Random Variables (2 of 2)
• The cumulative distribution functions
F ( x1 ) , F ( x2 ) ,..., F ( xk )
of the individual random variables are called their
marginal distribution functions

• The random variables are independent if and only if

F ( x1 , x2 ,..., xk ) = F ( x1 ) F ( x2 )  F ( xk )

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 60


Covariance
• Let X and Y be continuous random variables, with
means  x and  y

• The expected value of ( X −  x )(Y −  y ) is called the


covariance between X and Y

Cov ( X , Y ) = E ( X −  x ) (Y −  y ) 
• An alternative but equivalent expression is
Cov ( X , Y ) = E[ XY ] −  x  y

• If the random variables X and Y are independent, then the


covariance between them is 0. However, the converse is not true.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 61
Correlation
• Let X and Y be jointly distributed random variables.
• The correlation between X and Y is

Cov ( X , Y )
 = Corr ( X , Y ) =
 XY

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 62


Sums of Random Variables (1 of 2)
Let X 1 , X 2 ,..., X k be k random variables with
means 1 ,  2 ,...,  k and variances
 1 ,  2 ,...,  k . Then:
2 2 2

• The mean of their sum is the sum of their means

E ( X 1 + X 2 +  + X k )  = 1 + 2 +  +  k

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 63


Sums of Random Variables (2 of 2)
Let X 1 , X 2 ,..., X k be k random variables with means
1 , 2 ,..., k and variances  12 ,  22 ,...,  k2 . Then:
• If the covariance between every pair of these random
variables is 0, then the variance of their sum is the sum of
their variances
Var ( X 1 + X 2 +  + X k ) =  12 +  22 +  +  k2
• However, if the covariances between pairs of random
variables are not 0, the variance of their sum is
k −1 k
Var ( X 1 + X 2 +  + X k ) =  +  +  +  + 2 
2
1
2
2
2
k  Cov ( X i , X j )
i =1 j =i +1
Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 64
Differences Between a Pair of
Random Variables
For two random variables, X and Y
• The mean of their difference is the difference of
their means; that is
E  X − Y  =  X − Y
• If the covariance between X and Y is 0, then the
variance of their difference is
Var  X − Y  =  X2 +  Y2
• If the covariance between X and Y is not 0, then the
variance of their difference is
Var  X − Y  =  X2 +  Y2 − 2Cov ( X , Y )
Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 65
Linear Combinations of Random
Variables (1 of 2)
• A linear combination of two random variables, X and Y,
(where a and b are constants) is

W = aX + bY

• The mean of W is

W = E W  = E  aX + bY  = a  X + bY

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 66


Linear Combinations of Random
Variables (2 of 2)
• The variance of W is

 W2 = a 2 X2 + b 2 Y2 + 2abCov ( X , Y )

• Or using the correlation,

 W2 = a 2 X2 + b 2 Y2 + 2ab ( X , Y )  X  Y

• If both X and Y are joint normally distributed random


variables then the linear combination, W, is also normally
distributed

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 67


Example 2 (1 of 2)
• Two tasks must be performed by the same worker.
– X = minutes to complete task 1;  x = 20,  x = 5
– Y = minutes to complete task 2;  y = 20,  y = 5
– X and Y are normally distributed and independent

• What is the mean and standard deviation of the time to


complete both tasks?

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 68


Example 2 (2 of 2)
– X = minutes to complete task 1;  x = 20,  x = 5
– Y = minutes to complete task 2;  y = 30,  y = 8
• What are the mean and standard deviation for the time to complete
both tasks?
W = X +Y
W =  X + Y = 20 + 30 = 50
• Since X and Y are independent, Cov ( X , Y ) = 0, so

 =  +  + 2Cov ( X , Y ) = ( 5 ) + ( 8 ) = 89
2 2 2 2 2
W X Y

• The standard deviation is

 w = 89 = 9.434
Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 69
Financial Investment Portfolios
• A financial portfolio can be viewed as a linear
combination of separate financial instruments

 Proportion of   Proportion of 
 Return on     Stock 1    Stock 2 
  =  portfolio value     +  portfolio value    
 portfolio     return     return 
 in stock 1   in stock 2 
 Proportion of 
   Stock N 
 +  portfolio value    
 in stock N   return 
 

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 70


Portfolio Analysis Example (1 of 3)
• Consider two stocks, A and B
– The price of Stock A is normally distributed with mean
12 and variance 4
– The price of Stock B is normally distributed with mean
20 and variance 16
– The stock prices have a positive correlation,  AB = .50
• Suppose you own
– 10 shares of Stock A
– 30 shares of Stock B

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 71


Portfolio Analysis Example (2 of 3)
• The mean and variance of this stock portfolio are:
(Let W denote the distribution of portfolio value)

W = 10 A + 20 B = (10 )(12 ) + ( 30 )( 20 ) = 720

 W2 = 102  A2 + 302  B2 + ( 2 )(10 )( 30 ) Corr ( A, B )  A B


= 10 ( 4 ) + 30 (16 ) + ( 2 )(10 )( 30 )(.50 )( 4 )(16 )
2 2 2 2

= 251, 200

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 72


Portfolio Analysis Example (3 of 3)
• What is the probability that your portfolio value is
less than $500?
W = 720
 W = 251, 200 = 501.20
500 − 720
• The Z value for 500 is Z = = −0.44
501.20
• P ( Z  −0.44 ) = 0.3300
– So the probability is 0.33 that your portfolio value is less than $500.

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slide - 73

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