Chapter 5:

Continuous Random Variables and Probability

Distributions

5.1 P(1.4 < X < 1.8) = F(1.8) – F(1.4) = (.5)(1.8) – (.5)(1.4) = 0.20

5.2 P(1.0 < X < 1.9) = F(1.9) – F(1.0) = (.5)(1.9) – (.5)(1.0) = 0.45

5.3 P(X < 1.4) = F(1.4) = (.5)(1.4) = 0.7

5.4 P(X > 1.3) = F(1.3) = (.5)(2.0) – (.5)(1.3) = 0.35

5.5 a.

Probability Density Function: f(x)

1.5
f(x)

1.0

0.5

0.0
0 1
X
 Chapter 5: Continuous Random Variables and Probability Distributions 123

b.
Cumulative distribution function: F(x)

1.0
F(x)

0.8

0.6

0.4

0.2

0.0

0.0 0.2 0.4 0.6 0.8 1.0

C17

c. P(X < .25) = .25

d. P(X >.75) = 1-P(X < .75) = 1-.75 = .25
e. P(.2 < X < .8) = P(X <.8) – P(X <.2) = .8 - .2 = .6

5.6 a.

Probability density function: f(x)

0.75
f(x)

0.50

0.25

0.00
0 1 2 3 4

X
124 Statistics for Business & Economics, 7th edition

b.
Cumulative density function: F(x)

1.0

0.8

0.6
F(x)

0.4

0.2

0.0
0 1 2 3 4
X

c. P(x < 1) = .25

d. P(X < .5) + P(X > 3.5)=P(X < .5) + 1 – P(X < 3.5) = .25

5.7 a. P(60,000 < X< 72,000) = P(X < 72,000) – P(X < 60,000) = .6 - .5 = .1
b. P(X < 60,000) < P(X < 65,000) < P(X < 72,000); .5 < P(X < 65,000) < .6

5.8 a. P(380 < X < 460) = P(X < 460) – P(X < 380) = .6 - .4 = .2
b. P(X < 380) < (PX< 400) < P(X < 460); .4 < P(X < 400) < .6

5.9 W = a + bX. If TC = 1000 + 2X where X = number of units produced, find

the mean and variance of the total cost if the mean and variance for the
number of units produced are 500 and 900 respectively. W  a  b x =
1000 + 2(500) = 2000.  W  b  X = (2)2(900) = 3600.
2 2 2

5.10 W = a + bX. If Available Funds = 1000 - 2X where X = number of units

produced, find the mean and variance of the profit if the mean and
variance for the number of units produced are 50 and 90 respectively.
W  a  b x = 1000 - 2(50) = 900.  2W  b 2 2 X = (-2)2(90) = 360.

5.11 W = a + bX. If Available Funds = 2000 - 2X where X = number of units

produced, find the mean and variance of the profit if the mean and
variance for the number of units produced are 500 and 900 respectively.
W  a  b x = 2000 - 2(500) = 1000.  2W  b 2 2 X = (-2)2(900) = 3600.

5.12 W = a + bX. If Available Funds = 6000 - 3X where X = number of units

produced, find the mean and variance of the profit if the mean and
variance for the number of units produced are 1000 and 900 respectively.
W  a  b x = 6000 - 2(1000) = 4000.  2W  b 2 2 X = (-3)2(900) = 8100
 Chapter 5: Continuous Random Variables and Probability Distributions 125

5.13 Y = 10,000 + 1.5 X = 10,000 + 1.5 (30,000) = $55,000

Y = |1.5| X = 1.5 (8,000) = $12,000

5.14 Y = 20 + X = 20 + 4 = $24 million

Bid = 1.1 Y =1.1(24) = $26.4 million,  = $1 million

5.15 Y = 60 + .2 X = 60 + 140 = $200

Y = |.2| X = .2 (130) = $26

5.16 Y = 6,000 + .08 X = 6,000 + 48,000 = $54,000

Y = |.08| X = .08(180,000) = $14,400

5.17 a. P(Z < 1.20) = .8849

b. P(Z > 1.33) = 1 – Fz(1.33) = 1 - .9082 = .0918
c. P(Z < -1.70) = 1 – Fz(1.70) = 1 - .9554 = .0446
d. P(Z > -1.00) = Fz(1) = .8413
e. P(1.20 < Z < 1.33) = Fz(1.33) – Fz(1.20) = .9082 - .8849 = .0233
f. P(-1.70 < Z < 1.20) = Fz(1.20) – [1 - Fz(1.70)] = .8849 – .0446 = .8403
g. P(-1.70 < Z < -1.00) = Fz(1.70) – Fz(1.00) = .9554 - .8413 = .1141

5.18 a. Find Z0 such that P(Z < Z0) = .7, closest value of Z0 = .52
b. Find Z0 such that P(Z < Z0) = .25, closest value of Z0 = -.67
c. Find Z0 such that P(Z > Z0) = .2, closest value of Z0 = .84
d. Find Z0 such that P(Z > Z0) = .6, closest value of Z0 = -.25

5.19 X follows a normal distribution with µ = 50 and 2 = 64

60  50
a. Find P(X > 60). P(Z > ) = P(Z > 1.25) = .5
8
- .3944 = .1056
35  50 62  50
b. Find P(35 < X < 62). P( <Z< ) = P(-1.88 < Z < 1.5)
8 8
= .4699 + .4332 = .9031
55  50
c. Find P(X < 55). P(Z < ) = P(Z < .62) = .5 + .
8
2324 = .7324
d. Probability is .2 that X is greater than what number? Z = .84.
X  50
.84  X = 56.72
8
e. Probability is .05 that X is in the symmetric interval about the mean
X  50
between? Z = +/- .06. .06  . X = 49.52 and 50.48.
8
126 Statistics for Business & Economics, 7th edition

5.20 X follows a normal distribution with µ = 80 and 2 = 100

60  80
a. Find P(X > 60). P(Z > ) = P(Z > -2.00) = .5 + .4772 = .9772
10
72  80 82  80
b. Find P(72 < X < 82). P( <Z< ) = P(-.80 < Z < .20) =
10 10
.2881 + .0793 = .3674
55  80
c. Find P(X < 55). P(Z < ) = P(Z < -2.50) = .5 - .4938 = .0062
10
d. Probability is .1 that X is greater than what number? Z = 1.28.
X  80
1.28  X = 92.8
10
e. Probability is .08 that X is in the symmetric interval about the mean
X  80
between? Z = +/- .10. .10  . X = 79 and 81.
10

5.21 X follows a normal distribution with µ = .2 and 2 = .0025

.4  .2
a. Find P(X > .4). P(Z > ) = P(Z > 4.00) = .5 - .5 = .0000
.05
.15  .2 .28  .2
b. Find P(.15 < X < .28). P( <Z< ) = P(-1.00 < Z <
.05 .05
1.60) = .3431 + .4452 = .7883
.10  .20
c. Find P(X < .10). P(Z < ) = P(Z < -2.00) = .5 - .4772 = .0228
.05
d. Probability is .2 that X is greater than what number? Z = .84.
X  .20
.84  X = .242
.05
e. Probability is .05 that X is in the symmetric interval about the mean
X  .2
between? Z = +/- .06. .06  . X = .197 and .203.
.05

400  380
5.22 a. P(Z < ) = P(Z < .4) = .6554
50
360  380
b. P(Z > ) = P(Z > -.4) = FZ(.4) = .6554
50
c. The graph should show the property of symmetry – the area in the tails
equidistant from the mean will be equal.
300  380 400  380
d. P( <Z< ) = P(-1.6 < Z < .4) = FZ(.4) – [1-
50 50
FZ(1.6)] = .6554 - .0548 = .6006
e. The area under the normal curve is equal to .8 for an infinite number
of ranges – merely start at a point that is marginally higher. The
shortest range will be the one that is centered on the z of zero. The z
 Chapter 5: Continuous Random Variables and Probability Distributions 127

that corresponds to an area of .8 centered on the mean is a Z of ±1.28.

This yields an interval of the mean plus and minus $64: [$316, $444]

1, 000  1, 200
5.23 a. P(Z > ) = P(Z > -2) =FZ(2) = .9772
100
1,100  1, 200 1,300  1, 200
b. P( <Z< ) = P(-1 < Z < 1) = 2FZ(1) –1 = .
100 100
6826
c. P(Z > 1.28) = .1, plug into the z-formula all of the known information
Xi  1, 200
and solve for the unknown: 1.28 = . Solve algebraically
100
for Xi = 1,328

38  35
5.24 a. P(Z > ) = P(Z > .75) = 1 - FZ(.75) = .2266
4
32  35
b. P(Z < ) = P(Z < -.75) = 1 - FZ(.75) = .2266
4
32  35 38  35
c. P( <Z< ) = P(-.75 < Z < .75) = 2FZ(.75) – 1 =
4 4
2(.7734) – 1 = .5468
d. (i) The graph should show the property of symmetry – the area in the
tails equidistant from the mean will be equal.
(ii) The answers to a, b, c sum to one because the events cover the
entire area under the normal curve which by definition, must sum to 1.

20  12.2
5.25 a. P(Z > ) = P(Z > 1.08) = 1 – Fz (1.08) = .1401
7.2
0  12.2
b. P(Z < ) = P(Z < -1.69) = 1 – Fz (1.69) = .0455
7.2
5  12.2 15  12.2
c. P( <Z< ) = P(-1 < Z < .39) = Fz (.39) – [1- Fz (1)]
7.2 7.2
= .6517 - .1587 = .4930

10  12.2
5.26 a. P(Z < ) = P(Z < - .79) = 1 – Fz (.79) = .2148
2.8
15  12.2
b. P(Z > ) = P(Z > 1) = 1 – Fz (1) = .1587
2.8
12  12.2 15  12.2
c. P( <Z< ) = P(-.07 < Z < 1) = Fz (1) – [1- Fz (.07)]
2.8 2.8
= .8413 - .4721 = .3692
d. The answer to a. will be larger because 10 grams is closer to the mean
than is 15 grams. Thus, there would be a greater area remaining less
than 10 grams than will be the area above 15 grams.
128 Statistics for Business & Economics, 7th edition

460  500 540  500

5.27 a. P( <Z< ) = P(-.8 < Z < .8) = 2 Fz (.8) – 1 = .5762
50 50
b. If P(Z < -.84) = .2, then plug into the z formula and solve for the Xi:
Xi  500
the value of the cost of the contract. -.84 = . Xi = $458
50
(thousand dollars)
c. The shortest 95% range will be the interval centered on the mean.
Xi  500
Since the P(Z > 1.96) = .025, 1.96 = . Xi = 598. The
50
Xi  500
lower value of the interval will be –1.96 = which is Xi =
50
$402 (thousand dollars). Therefore, the shortest range will be 598 –
402 = $196 (thousand dollars).

5.28 P(Z > 1.5) = 1 - Fz(1.5) = .0668

Xi  18.2
5.29 P(Z < -1.28) = .1, –1.28 = Xi = 16.152
1.6

5.30 P(Z > .67) = .25, .67 = 17.8 - 

P(Z > 1.03) = .15, 1.04 = 19.2 - 
Solving for , :  = 15.265, 2 = (3.7838)2 = 14.317

820  700
5.31 a. P(Z > ) = P(Z> 1) = 1 – Fz (1) = .1587
120
730  700 820  700
b. P( <Z< ) = P(.25 < Z < 1) = .8413 - .5987 = .
120 120
2426
Number of students = .2426(100) = 24.26 or 24 students
Xi  700
c. P(Z < -1.645) = .05, –1.645 = , Xi = 502.6
120

5.32 For Investment A, the probability of a return higher than 10%:

10  10.4
P(Z > ) = P(Z > -.33) = FZ(.33) = .6293
1.2
For Investment B, the probability of a return higher than 10%
10  11.0
P(Z > ) = P(Z > -.25) = FZ(.25) = .5987
4
Therefore, Investment A is a better choice
 Chapter 5: Continuous Random Variables and Probability Distributions 129

5  4.4
5.33 For Supplier A: P(Z < ) = P(Z < 1.5) = .9332
.4
5  4.2
For Supplier B: P(Z < ) = P(Z < 1.33) = .9082
.6
Therefore, Supplier A has a greater probability of achieving less than 5%
impurity and is hence the better choice

Xi  150
5.34 a. P(Z > -1.28) = .9, -1.28 = , Xi = 98.8
40
Xi  150
b. P(Z < .84) = .8, .84 = , Xi = 183.6
40
120  150 2
c. P(X  1) = 1 – P(X = 0) = 1-[P(Z< )] = 1 – [P(Z < -.75)]2
40
= 1 – (.2266)2 = .9487

60  75
5.35 a. P(Z < ) = P(Z < -.75) = .2266
20
90  75
b. P(Z > ) = P(Z >.75) = .2266
20
c. The graph should show that 60 minutes and 90 minutes are equidistant
from the mean of 75 minutes. Therefore, the areas above 90 minutes
and below 60 minutes by the property of symmetry must be equal.
Xi  75
d. P(Z > 1.28) = .1, 1.28 = , Xi = 100.6
20

400  420 480  420

5.36 a. P( <Z< ) = P(-.25 < Z < .75) = Fz (.75) – [1 – FZ
80 80
(.25)] = .7734 - .4013 =.3721
Xi  420
b. P(Z > 1.28) = .1, 1.28 = , Xi = 522.4
80
c. 400 – 439
d. 520 – 559
500  420 2
e. P(X 1) = 1 –P(X = 0 ) = 1 – [P(Z< )] = 1 – (.8413)2 = .2922
80

180  200
5.37 a. P( < Z < 0) = .5 – [1- Fz (1)] = .5 -.1587 = .3413
20
245  200
b. P(Z > ) = 1 – FZ(2.25) = .0122
20
c. Smaller
Xi  200
d. P(Z < -1.28) = .1, -1.28 = , Xi = 174.4
20
130 Statistics for Business & Economics, 7th edition

85  70
5.38 P(Z < 1.5) = .9332, 1.5 = ,  = 10

80  70
P(Z > ) = P(Z > 1) = .1587
10
P(X  1) = 1 – P(X=0) = 1 – [FZ(1)]4 = 1 – (.8413)4 = .4990

5.39 n = 900 from a binomial probability distribution with P = .50

a. Find P(X > 500). E[X] =  = 900(.5) = 450,  = (900)(.5)(.5) =
500  450
15 P(Z > ) = P(Z > 3.33) = 1 – FZ(3.33) = .0004
15
430  450
b. Find P(X < 430). P(Z < ) = P(Z < -1.33) = 1 - FZ(1.33) = .
15
0918
440  450 480  450
c. P( <Z< ) = P(-.67 < Z < 2.00) = fz (-.67) +
15 15
fZ(2.00) = .2486 + .4772 = .7258
d. Probability is .1 that the number of successes is less than how many?
X  450
Z= -1.28. 1.28  X = 430.8
15
e. Probability is .08 the number of successes is greater than? Z = 1.41.
X  450
1.41  . X = 471.15.
15

5.40 n = 1600 from a binomial probability distribution with P = .40

a. Find P(X > 1650). E[X] =  = 1600(.4) = 640,  =
1650  1600
(1600)(.4)(.6) = 19.5959 P(Z > )=
19.5959
P(Z > 2.55) = 1 – FZ(2.55) = .0054
1530  1600
b. Find P(X < 1530). P(Z < ) = P(Z <
19.5959
-3.57) = 1 - FZ(3.57) = .0002
1550  1600 1650  1600
c. P( <Z< ) = P(-2.55 < Z <
19.5959 19.5959
2.55) = (2)Fz (2.55) = (2).4946 = .9892
d. Probability is .09 that the number of successes is less than
X  1600
how many? Z = -1.34. 1.34  X=
19.5959
1573.741 1,574 successes
e. Probability is .20 the number of successes is greater than?
X  1600
Z = .84. .84  . X = 1616.46 1,616 successes
19.5959
 Chapter 5: Continuous Random Variables and Probability Distributions 131

5.41 n = 900 from a binomial probability distribution with P = .10

a. Find P(X > 110). E[X] =  = 900(.1) = 90,  =
110  90
(900)(.1)(.9) = 9 P(Z > ) = P(Z >
9
2.22) = 1 – FZ(2.22) = .0132
53  90
b. Find P(X < 53). P(Z < ) = P(Z < -4.11) = 1 -
9
FZ(4.11) = .0000
55  90 120  90
c. P( <Z< ) = P(-3.89 < Z < 3.33) =
9 9
1.0000
d. Probability is .10 that the number of successes is less
X  90
than how many? Z = -1.28. 1.28  X
9
= 78.48
e. Probability is .08 the number of successes is greater
X  90
than? Z = 1.41. 1.41  . X = 102.69
9

5.42 n = 1600 from a binomial probability distribution with P = .40

a. Find P(P > .45). E[P] =  = P = .40,  =
P(1  P) .4(1  .4) .45  .40
 = .01225 P(Z > )
n 1600 .01225
= P(Z > 4.082) = 1 – FZ(4.082) = .0000
.36  .40
b. Find P(P < .36). P(Z < ) = P(Z < -3.27) = 1
.01225
- FZ(3.27) = .0005
.44  .40 .37  .40
c. P( <Z< ) = P(3.27 < Z < -2.45) =
.01225 .01225
1 – [(2)[1-Fz (3.27)]] = 1 - (2)[1-.9995] = .9995 - .
0071 = .9924
d. Probability is .20 that the percentage of successes is
X  .40
less than what percent? Z = -.84. .84  P
.01225
= 38.971%
e. Probability is .09 the percentage of successes is
X  .40
greater than? Z = 1.34. 1.34  . P=
.01225
41.642%
132 Statistics for Business & Economics, 7th edition

5.43 n = 400 from a binomial probability distribution with P = .20

a. Find P(P > .25). E[P] =  = P = .20,  =
P(1  P) .2(1  .8) .25  .20
 = .02 P(Z > )=
n 400 .02
P(Z > 2.50) = 1 – FZ(2.50) = 1 - .4938 = .0062
.16  .20
b. Find P(P < .16). P(Z < ) = P(Z < -2.00) = 1
.02
- FZ(2.00) = .0228
.17  .20 .24  .20
c. P( <Z< ) = P(-1.50 < Z < 2.00) =
.02 .02
[Fz (1.50) - .5] + [Fz (2.00) - .5] = .4332 + .4772 = .
9104
d. Probability is .15 that the percentage of successes is
X  .20
less than what percent? Z = -1.04. 1.04 
.02
P = 17.92%
e. Probability is .11 the percentage of successes is
X  .20
greater than? Z = 1.23. 1.23  . P = 22.46%
.02

5.44 a. E[X] =  = 900(.2) = 180,  = (900)(.2)(.8) = 12

200  180
P(Z > ) = P(Z > 1.67) = 1 – FZ(1.67) = .0475
12
175  180
b. P(Z < ) = P(Z < -.42) = 1 - FZ(.42) = .3372
12

5.45 a. E[X] =  = 400(.1) = 40,  = (400)(.1)(.9) = 6

35  40
P(Z > ) = P(Z > -.83) = FZ(.83) = .7967
6
40  40 50  40
b. P( <Z< ) = P(0 < Z < 1.67) = Fz (1.67) – FZ(0) =
6 6
9525 - .5 = .4525
34  40 48  40
c. P( <Z< ) = P(-1 < Z < 1.33) = Fz (1.33) – [1 – FZ(1)]
6 6
= .9082 - .1587 = .7495
d. 39 - 41

5.46 E[X] = (100)(.6) = 60,  = (100)(.6)(.4) = 4.899

50  60
P(Z < ) = P(Z < -2.04) = 1 – FZ(2.04) = 1- .9793 = .0207
4.899
 Chapter 5: Continuous Random Variables and Probability Distributions 133

5.47 a. E[X] = (450)(.25) = 112.5,  = (450)(.25)(.75) = 9.1856

100  112.5
P(Z < ) = P(Z < -1.36) = 1 - FZ(1.36) = 1 - .9131 = .0869
9.1856
120  112.5 150  112.5
b. P( <Z< ) = P(.82 < Z < 4.08) = Fz(4.08) -
9.1856 9.1856
Fz(.82) = 1.000 - .7939 = .2061

38  35
5.48 P(Z > ) = P(Z > .75) = 1 - FZ(.75) = 1 - .7734 = .2266
4
E[X] = 100(.2266) = 22.66,  = (100)(.2266)(.7734) = 4.1863
25  22.66
P(Z > ) = P(Z > .56) = 1 - FZ(.56) = 1 - .7123 = .2877
4.1863

10  12.2
5.49 P(Z ≤ ) = P(Z < -.79) = 1 - FZ(.79) = 1 - .7852 = .2148
2.8
E[X] = 400(.2148) = 85.92,  = (400)(.2148)(.7852) = 8.2137
100  85.92
P(Z > ) = P(Z > 1.71) = 1 - FZ(1.71) = 1 - .9564 = .0436
8.2137

5.50  = 1.0, what is the probability that an arrival occurs in the first t=2 time
units?
Cumulative Distribution Function
Exponential with mean = 1
x P( X <= x )
0 0.000000
1 0.632121
2 0.864665
3 0.950213
4 0.981684
5 0.993262
P(T < 2) = .864665

5.51  = 8.0, what is the probability that an arrival occurs in the first t=7 time
units?
Cumulative Distribution Function
Exponential with mean = 8
x P( X <= x )
0 0.000000
1 0.117503
2 0.221199
3 0.312711
4 0.393469
5 0.464739
6 0.527633
7 0.583138
8 0.632121
P(T < 7) = .583138
134 Statistics for Business & Economics, 7th edition
 Chapter 5: Continuous Random Variables and Probability Distributions 135

5.52  = 5.0, what is the probability that an arrival occurs after t=7 time units?
Cumulative Distribution Function
Exponential with mean = 5
x P( X <= x )
0 0.000000
1 0.181269
2 0.329680
3 0.451188
4 0.550671
5 0.632121
6 0.698806
7 0.753403
8 0.798103
P(T>7) = 1-[P(T ≤ 8)] = 1 - .7981 = .2019

5.53  = 6.0, what is the probability that an arrival occurs after t=5 time units?
Cumulative Distribution Function
Exponential with mean = 6
x P( X <= x )
0 0.000000
1 0.153518
2 0.283469
3 0.393469
4 0.486583
5 0.565402
6 0.632121
P(T>5) = 1-[P(T≤6)] = 1 - .6321 = .3679

5.54  = 3.0, what is the probability that an arrival occurs after t=2 time units?
Cumulative Distribution Function
Exponential with mean = 3
x P( X <= x )
0 0.000000
1 0.283469
2 0.486583
3 0.632121
P(T<2) = .4866

5.55 a. P(X < 20) = 1 - e  (20 /10) = .8647

b. P(X > 5) = 1 – [1 - e  (5/10) ] = e  (5/10) = .6065
c. P(10 < X < 15) = (1- e  (15/10) - (1 - e  (10 /10) ) = e 1 - e 1.5 = .1447

5.56 P(X > 18) = e  (18/15) = .3012

5.57 P(X > 2) = e  (2)(.8) = .2019

5.58 a. P(X > 3) = 1 – [1 - e  (3/  ) ] = e 3 since  = 1 / 

b. P(X > 6) = 1 – [1 - e  (6 /  ) ] = e  (6 /  ) = e 6 
c. P(X>6|X>3) = P(X > 6)/P(X > 3) = e 6  / e 3 ] = e 3
The probability of an occurrence within a specified time in the future
is not related to how much time has passed since the most recent
occurrence.
136 Statistics for Business & Economics, 7th edition

5.59 Find P (t  3) . Note that

  40 calls / 60 minutes  2 calls / 3 minutes.
P(t  3)  1  P (t  3)  1  [1  e  ( 2 / 3)(3) ]  e 2  0.1353

5.60 Let   20 trucks / 60 minutes  1 truck / 3 minutes.

a. (t  5)  1  P(t  5)  1  [1  e  (1/ 3)( 5) ]  0.1889
P
b. P(t  1)  1  e  (1/ 3)( 2 )  0.4866
c. P (4  t  10)  [1  e  (1/ 3)(10) ]  [1  e  (1/ 3)( 4 ) ]  0.2279

5.61 Find the mean and variance of the random variable: W = 5X + 4Y

with correlation = .5
W  a x  b y = 5(100) + 4(200) = 1300
 2W  a 2 2 X  b2 2Y  2abCorr ( X , Y ) X  Y
= 52(100) + 42(400) + 2(5)(4)(.5)(10)(20) = 12,900

5.62 Find the mean and variance of the random variable: W = 5X + 4Y

with correlation = -.5
W  a x  b y = 5(100) + 4(200) = 1300
 2W  a 2 2 X  b2 2Y  2abCorr ( X , Y ) X  Y
= 52(100) + 42(400) + 2(5)(4)(-.5)(10)(20) = 4,900

5.63 Find the mean and variance of the random variable: W = 5X – 4Y with
correlation = .5.
W  a x  b y = 5(100) – 4(200) = -300
 2W  a 2 2 X  b2 2Y  2abCorr ( X , Y ) X  Y
= 52(100) + 42(400) – 2(5)(4)(.5)(10)(20) = 4900

5.64 Find the mean and variance of the random variable: W = 5X – 4Y with
correlation = .5.
W  a x  b y = 5(500) – 4(200) = 1700
 2W  a 2 2 X  b2 2Y  2abCorr ( X , Y ) X  Y
= 52(100) + 42(400) – 2(5)(4)(.5)(10)(20) = 4900

5.65 Find the mean and variance of the random variable: W = 5X – 4Y with
correlation of -.5.
W  a x  b y = 5(100) – 4(200) = -300
 2W  a 2 2 X  b2 2Y  2abCorr ( X , Y ) X  Y
= 52(500) + 42(400) – 2(5)(4)(-.5)(22.3607)(20) = 27,844.28
 Chapter 5: Continuous Random Variables and Probability Distributions 137

5.66  Z = 100,000(.1) + 100,000(.18).  x = 10,000 + 18,000 = 28,000

Z = 0. Note that the first investment yields a certain profit of 10%
which is a zero standard deviation. x = 100,000(.06) = 6,000

5.67 Assume that costs are independent across years

 Z = 5  x = 5(200) = 1,000
Z = 5 x =
2
5(3, 600) = 134.16

5.68  Z = 1   2  3 = 50,000 + 72,000 + 40,000 = 162,000

Z = 1   2   3 =
2 2 2
(10, 000) 2  (12, 000) 2  (9, 000) 2 = 18,027.76

5.69  Z = 1   2  3 = 20,000 + 25,000 + 15,000 = 60,000

Z = 1   2   3 =
2 2 2
(2, 000) 2  (5, 000) 2  (4, 000) 2 = 6,708.2

5.70 The calculation of the mean is correct, but the standard deviations of two
random variables cannot be summed. To get the correct standard
deviation, add the variances together and then take the square root. The
standard deviation:   5(16) 2 = 35.7771

5.71  Z = (16  x ) / 16 =  x = 28
Z = 16 x 2 / 16 = (2.4) 2 / 16 = 2.4 / 4 = .6

5.72 a. Compute the mean and variance of the portfolio with correlation of +.5
W  a x  b y = 50(25) + 40(40) = 2850
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 502(121) + 402(225) + 2(50)(40)(.5)(11)(15) = 992,500
b. Recompute with correlation of -.5
W  a x  b y = 50(25) + 40(40) = 2850
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 502(121) + 402(225) + 2(50)(40)(-.5)(11)(15) = 332,500
5.73 a. Find the probability that total revenue is greater than total cost
W = aX – bY = 10X –[7Y+25)]
W  a x  b y = 10(100) – [7(100) + 250] = 50
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 102(64) + 72(625) – 2(10)(7)(.6)(8)(25) = 20,225  W  20, 225
= 142.2146

0  50
P(Z > ) = P(Z > -.35) = FZ(.35) = .6368
142.2146
138 Statistics for Business & Economics, 7th edition

b. 95% acceptance interval = 50 ± 1.96 (142.2146) = 50 ± 278.7406 =

-228.7406 to 328.7406

5.74 a. W = aX – bY = 10X – 10Y

W  a x  b y = 10(100) – 10(90) = 100
 2W  a 2 2 X  b2 2Y  2abCorr ( X , Y ) X  Y
=102(100) + 102(400) – 2(10)(10)(-.4)(10)(20) =66,000  W  66, 000
=256.90465

0  100
b. P(Z < ) = P(Z < -.39) = 1 – FZ(.39) = 1 – .6517 = .3483
256.90465

5.75
W = aX – bY = 10X – 4Y
W  a x  b y = 10(400) – 4(400) = 2400
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
=102(900) + 42(1600) – 2(10)(4)(.5)(30)(40) = 67,600  W  67, 600 =260

2000  2400
P(Z > ) = P(Z > -1.54) = FZ(1.54) = .9382
260

5.76 a. W = aX – bY = 1X – 1Y
W  a x  b y = 1(100) – 1(105) = -5
 2W  a 2 2 X  b2 2Y  2abCorr ( X , Y ) X  Y
=12(900) + 12(625) – 2(1)(1)(.7)(30)(25) = 475  W  475 =21.79449

0  (5)
b. P(Z > ) = P(Z > .23) = 1 – FZ(.23) = 1 – .5910 = .4090
21.79449

5.77 a. P(X < 10) = (10/12) – (8/12) = 1/6

b. P(X > 12) = (20/12) – (12/12) = 8/12 = 2/3
c. E[] = (20/12 – 12/12) = 2(2/3) = 1.333
d. To jointly maximize the probability of getting the contract and the
profit from that contract, maximize the following function: max E[]
= (B – 10)(20/12 – B/12). Where B is the value of the bid. To
determine the value for B that maximizes the expected profit, an
iterative approach can be used. The value of B is 15.
 Chapter 5: Continuous Random Variables and Probability Distributions 139

5.78 a.

Probability Density Function: f(x)

f(x)

0.033333

0.000000
30 35 40 45 50 55 60 65 70

b. Cumulative density function

Cumulative density function: F(x)

1.0

0.8

0.6
F(x)

0.4

0.2

0.0
35 40 45 50 55 60 65
X

c. P(40 < X < 50) = (50/30) – (40/30) = 10/30

65  35
d. E[X] = = 50
2
140 Statistics for Business & Economics, 7th edition

5.79 a. The probability density function f(x):

Probability density function: f(x)

1.50

f(x)

1.00

0.5

0.00
0 .5 1 1.5 3

b. Fx(x)  0 for all x. The area under fx(x) = 2[½(base x height)] = 1

.52 .52
c. P(.5 < X < 1.5 ) = (.5 - ) + (.5 - ) = .375 + .375 = .75
2 2

5.80 a.  Y = 2000(1.1) + 1000(1+  x ) = 2,200 + 1,160 = 3,360

b. Y = |1000| x = 1000(.08) = 80

5.81 a.  R = 1.45  x = 1.45(530) = 768.5

b. R = |1.45| x = 1.45(69) = 100.05
c.  = R – C = .5X – 100, E[] = .5  x -100 = 165,  = |.5| x = .5(69) =
34.5

5.82 Given that the variance of both predicted earnings and forecast error are
both positive and given that the variance of actual earnings is equal to the
sum of the variances of predicted earnings and forecast error, then the
Variance of predicted earnings must be less than the variance of actual
earnings

5.83 Cov[(X1 + X2), (X1 – X2)] = E[(X1 + X2)(X1 – X2)] – E[X1 + X2] E[X1 –
X2] = E[X12 - X22]– E[(X1) + E(X2)][E(X1) – E(X2)] =
E(X12) – E(X22) - [(E(X1))2 – (E(X2)2] = Var (X1) – Var (X2)
Which is 0 if and only if Var (X1) = Var (X2)
 Chapter 5: Continuous Random Variables and Probability Distributions 141

3  2.6
5.84 a. P(Z > ) = P(Z > .8) = 1 – FZ(.8) = .2119
.5
2.25  2.6 2.75  2.6
b. P( <Z< ) = P(-.7 < Z < .3) = Fz (.3) – [1-FZ(.3)]
.5 .5
= .3759
Xi  2.6
c. P(Z > 1.28) = .1, 1.28 = , Xi = 3.24
.5
d. P(Xi > 3) = .2119 (from part a)
E[X] = 400(.2119) = 84.76, x = (400)(.2119)(.7881) = 8.173
80  84.76
P(Z > ) = P(Z > -.58) = FZ(.58) = .7190
8.173
e. P(X  1) = 1 – P(X = 0) = 1 – (.7881)2 = .3789

65  60
5.85 a. P(Z > ) = P(Z > .5) = 1 – FZ(.5) = .3085
10
50  60 70  60
b. P( <Z< ) = P(-1 < Z < 1) = 2 Fz (1) – 1 = .6826
10 10
Xi  60
c. P(Z > 1.96) = .025, 1.96 = , Xi = 79.6
10
d. P(Z > .675) = .025, .675 = The shortest range will be the interval
Xi  60
centered on the mean. Since the P(Z > .675) = .025, .675 = .
10
Xi  60
Xi = 66.75. The lower value of the interval will be –.675 =
10
which is Xi = 53.25. Therefore, the shortest range will be 66.75 –
53.25 = 13.5. This is by definition the InterQuartile Range (IQR).
P(X > 65) = .3085 (from part a)
Use the binomial formula: P(X = 2) = C24 (.3085) 2 (.6915) 2 = 0.2731

85  100
5.86 a. P(Z < ) = P(Z < -.5) = .3085
30
70  100 130  100
b. P( <Z< ) = P(-1 < Z < 1) = 2 Fz (1) – 1 = .6826
30 30
Xi  100
c. P(Z > 1.645) = .05, 1.645 = , Xi = 149.35
30
60  100
d. P(Z > ) = P(Z > -1.33) = FZ(1.33) = .9032
30
P(X  1) = 1 – P(X = 0) = 1 – (.0918)2 = .9916
e. Use the binomial formula: P(X = 2) = C24 (.9082)2 (.0918) 2 = 0.0417
f. 90 – 109
g. 130 - 149
142 Statistics for Business & Economics, 7th edition

15  20 25  20
5.87 a. P( <Z< ) = P(-1.25 < Z < 1.25) = 2 FZ(1.25) –
4 4
1 = .7888
30  20
b. P(Z > ) = P(Z > 2.5) =1 - Fz (2.5) = .0062
4
c. P(X  1) = 1 – P(X = 0) = 1 – [FZ(2.5)]5 = .0306
Xi  20
d. P(Z > .525) = .3, .525 = , Xi = 22.1 The shortest range will
4
be the interval centered on the mean. The lower value of the interval
Xi  20
will be –.525 = which is Xi = 17.9. Therefore, the shortest
4
range is 22.1 – 17.9 = 4.2.
e. 19 – 21
f. 21 – 23

130  100
5.88 P(Z > 1.28) = .1, 1.28 = ,  = 23.4375

140  100
P(Z > ) = P(Z > 1.71) = 1 – FZ(1.71) = .0436
23.4375

25  
5.89 P(Z > 1.28) = .1, 1.28 = ,  = 21.8
2.5
20  21.8
P(Z < ) = P(Z < -.72) = 1 – FZ(.72) = .2358
2.5

5.90 E[X] = 1000(.4) = 400, x = (1000)(.4)(.6) = 15.4919

500  400
P(Z < ) = P(Z < 6.45)  1.0000
15.4919

5.91 E[X] = 400(.6) = 240, x = (400)(.6)(.4) = 9.798

200  240
P(Z > ) = P(Z > -4.08)  1.0000
9.798

5.92 The number of calls per 12-hour time period follows a Poisson
distribution with   15 calls / 12 - hour time period.

Cumulative Distribution Function

Poisson with mu = 15.0000

x P( X <= x)
0.00 0.0000
1.00 0.0000
2.00 0.0000
 Chapter 5: Continuous Random Variables and Probability Distributions 143

3.00 0.0002
4.00 0.0009
5.00 0.0028
6.00 0.0076
7.00 0.0180
8.00 0.0374
9.00 0.0699
10.00 0.1185
11.00 0.1848
12.00 0.2676
13.00 0.3632
14.00 0.4657
15.00 0.5681
16.00 0.6641
17.00 0.7489

P( x  10)  P ( x  9)  0.0699
P( x  17)  1  P ( x  17)  1  0.7489  0.2511

e 6 66
5.93 a. P(X = 6) = = .1606
6!
6
b. 20 minutes = 1/3 hours, P(X > 1/3) = e  3 = .1353
6
c. 5 minutes = 1/12 hour, P(X < 1/12) = 1 - e 12 = .3935
d. 30 minutes = .5 hour, P(X > .5) = e  (.5)(6) = .0498

5.94 a. E[X] = 600(.4) = 240, x = (600)(.4)(.6) = 12

260  240
P(Z > ) = P(Z > 1.67) = 1 – FZ(1.67) = .0475
12
Xi  240
b. P(Z > -.254) = .6, -.254 = , Xi = 236.95 (237 listeners)
12

120  132 150  132

5.95 a. P( <Z< ) = P(- 1 < Z < 1.5) = FZ (1.5) – [1 – FZ(1)]
12 12
= .7745
Xi  132
b. P(Z > .44) = .33, .44 = , Xi = 137.28
12
120  132
c. P(Z < ) = P(Z < -1) = 1 – FZ(1) = .1587
12
d. E[X] = 100(.1587) = 15.87, x = (100)(.1587)(.8413) = 3.654
25  15.87
P(Z > ) = P(Z > 2.5) = 1 – FZ(2.5) = .0062
3.654
144 Statistics for Business & Economics, 7th edition

3.5  2.4
5.96 P(Z>1.28)=.1, 1.28= , =.8594. Probability that 1 exec

3  2.4
spends 3+ hours on task: P(Z > ) = P(Z > .7) = 1 – FZ(.7) = .242.
.8594
80  96.8
E[X] = 400(.242) = 96.8, x = (400)(.242)(.758) = 8.566. P(Z >
8.566
)=P(Z>-1.96) = FZ(1.96)=.975

5.97 Portfolio consists of 10 shares of stock A and 8 shares of stock B.

a. Find the mean and variance of the portfolio value: W = 10X + 8Y with
correlation of .3.
W  a x  b y = 10(10) + 8(12) = 196
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 102(16) + 82(9) + 2(10)(8)(.3)(4)(3) = 2,752
b. Option 1: Stock 1 with mean of 10, variance of 25, correlation of -.2.
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 102(25) + 82(9) + 2(10)(8)(-.2)(5)(3) = 2,596
Option 2: Stock 2 with mean of 10, variance of 9, correlation of .6.
= 102(25) + 82(9) + 2(10)(8)(.6)(5)(3) = 2,340
To reduce the variance of the porfolio, select Option 2

5.98 Portfolio consists of 10 shares of stock A and 8 shares of stock B

a. Find the mean and variance of the portfolio value: W = 10X + 8Y with
correlation of .3.
W  a x  b y = 10(12) + 8(10) = 200
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 102(14) + 82(12) + 2(10)(8)(.5)(3.74166)(3.4641) = 3,204.919
b. Option 1: Stock 1 with mean of 12, variance of 25, correlation of -.2.
 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 122(25) + 82(12) + 2(10)(8)(-.2)(5)(3.4641) = 3,813.744
Option 2: Stock 2 with mean of 10, variance of 9, correlation of .6.
= 102(9) + 82(12) + 2(10)(8)(.6)(3)(3.4641) = 2,665.66
To reduce the variance of the porfolio, select Option 2
 Chapter 5: Continuous Random Variables and Probability Distributions 145

5.99
W  a x  b y = 1(800000) + 1(60000) = 140000
 2W  a 2 2 X  b2 2Y  2abCorr ( X , Y ) X  Y
= 12(1000000) + 12(810000) + 2(1)(1)(.4)(1000)(900) = 2,530,000
 W  2,530, 000  1590.597372
Probability that the weight is between 138,000 and 141,000:
138, 000  140, 000 141, 000  140, 000
= –1.26 fz = .3962, = .63 fz = .
1590.597372 1590.597372
2357
.3962 + .2357 = .6319

5.100 a. W  a x  b y = 1(40) + 1(35) = 75

 2W  a 2 2 X  b 2 2Y  2abCorr ( X , Y ) X  Y
= 12(100) + 12(144) + 2(1)(1)(.6)(10)(12) = 388
 W  388  19.69772
Probability that all seats are filled:
100  75
= 1.27 Fz = .8980. 1 – .8980 = .1020
19.69772
b. Probability that between 75 and 90 seats will be filled:
90  75
= .76 .5 – Fz(.76) = .2764
19.69772

5.101
Mean and variance for stock prices:
  Alcoa Inc. Reliant Energy, Inc. Sea Containers Ltd.
Mean 31.98286 13.07000 10.55286
Variance 27.41879 54.08367 60.97572

Covariances:
  Alcoa Inc. Reliant Energy, Inc.
Reliant Energy, Inc. 22.1591  
Sea Containers Ltd. 5.6791 -27.7501

Let the total value of the portfolio be represented by variable W.

W = (0.3333)(31.98286) + (0.3333)(13.07000) + (0.3333)(10.55286) = 18.54

 W2 = (0.33332)(27.41879) + (0.33332)(54.08367) + (0.33332)(60.97572) +

2[(0.3333)(0.3333)(22.1591) + (0.3333)(0.3333)(5.679) +
(0.3333)(0.3333)(-27.7501)] = 15.85
146 Statistics for Business & Economics, 7th edition

We can confirm these results by finding the portfolio price for each year, shown
next, and then by finding the mean and variance of these prices.

Portfolio Price
20.9567
14.9733
17.4767
21.5867
21.2033
11.6367
21.9133

Descriptive Statistics: Portfolio Price

Variable N N* Mean SE Mean StDev Variance Minimum Q1

Median
Portfolio Price 7 0 18.54 1.50 3.98 15.85 11.64 14.97
20.96

Variable Q3 Maximum
Portfolio Price 21.59 21.91

The previous output confirms that W = 18.54 and  W = 15.85.

2

Assuming that the portfolio price is normally distributed, the narrowest interval
that contains 95% of the distribution of portfolio value is centered at the mean.
Therefore, it is W  z / 2 W . Using z / 2  1.96 and  W  3.98, the interval is
18.54  (1.96)(3.98) or (10.74, 26.34).

5.102
Mean and variance for stock prices:
TCF Financial
  AB Volvo (ADR) Alcoa Inc. Pentair Inc. Corporation
Mean 8.6143 31.9829 28.9543 25.1643
Variance 25.4171 27.4188 95.4157 20.4361

Covariances:
  AB Volvo (ADR) Alcoa Inc. Pentair Inc.
Alcoa Inc. 6.5180    
Pentair Inc. 31.2128 5.4712  
TCF Financial
Corporation -4.3594 -2.7947 20.6897
 Chapter 5: Continuous Random Variables and Probability Distributions 147

Let the total value of the portfolio be represented by variable W.

W = (0.3333)(8.6143) + (0.1667)(31.9829) + (0.3333)(28.9543) + (0.1667)

(25.1643) = 22.05

 W2 = (0.33332)(25.4171) + (0.16672)(27.4188) + (0.33332)(95.4157) + (0.16672)

(20.4361) + 2[(0.3333)(0.1667)(6.5180) + (0.3333)(0.3333)(31.2128) + (0.3333)
(0.1667)(-4.3594) + (0.1667)(0.3333)(5.4712) +
(0.1667)(0.1667)(-2.7947) + (0.3333)(0.1667)(20.6897)] = 24.68

We can confirm these results by finding the portfolio price for each year, shown
next, and then by finding the mean and variance of these prices.

Portfolio Price
26.1833
24.6217
24.0983
27.7533
20.2700
14.3017
17.1033

Descriptive Statistics: Portfolio Price

Variable N N* Mean SE Mean StDev Variance Minimum Q1

Median
Portfolio Price 7 0 22.05 1.88 4.97 24.68 14.30 17.10
24.10

Variable Q3 Maximum
Portfolio Price 26.18 27.75

The previous output confirms that W = 22.05 and  W = 24.68.

2

Assuming that the portfolio price is normally distributed, the narrowest interval
that contains 95% of the distribution of portfolio value is centered at the mean.
Therefore, it is W  z / 2 W . Using z / 2  1.96 and  W  4.97, the interval is
22.05  (1.96)(4.97) or (12.31, 31.79).

5.103
Mean and variance for stock prices:
General Sea
3M Alcoa Intel Potlatch Motors Containers
  Company Inc. Corporation Corporation Corporation Ltd.
31.98
Mean 75.373 3 24.904 39.684 36.279 10.553
27.41
Variance 113.671 9 34.680 111.229 150.734 60.976
148 Statistics for Business & Economics, 7th edition
 Chapter 5: Continuous Random Variables and Probability Distributions 149

Covariances:
3M Alcoa Intel Potlatch General Motors
  Company Inc. Corporation Corporation Corporation
Alcoa Inc. 25.5503        
28.361
Intel Corporation 14.0721 2      
Potlatch Corporation 81.3497 9.8462 2.9658    
General Motors 23.187
Corporation -28.2769 6 32.7968 -74.5682  
Sea Containers Ltd. -1.2885 5.6791 17.3941 -2.1902 57.4105

Let the total value of the portfolio be represented by variable W. The mean and
variance for this portfolio, W and  W2 , can be found using the following
equations or by using technology.

k k k 1 k
W   ai i ,  W2   ai2 i2  2 a a i j Cov ( X i , X j )
i 1 i 1 i 1 j i 1

Descriptive Statistics: Portfolio Price

Variable N N* Mean SE Mean StDev Variance Minimum Q1

Median
Portfolio Price 7 0 36.46 1.87 4.95 24.54 28.28 33.91
36.16

Variable Q3 Maximum
Portfolio Price 41.20 43.58

As previously shown, W = 36.46 and  W = 24.54.

2

Assuming that the portfolio price is normally distributed, the narrowest interval
that contains 95% of the distribution of portfolio value is centered at the mean.
Therefore, it is W  z / 2 W . Using z / 2  1.96 and  W  4.95, the interval is
36.46  (1.96)( 4.95) or (26.76, 46.16).

5.104
Mean and variance for stock price growth:
Intel
3M Alcoa Corporatio Potlatch General Motors Sea Containers
  Company Inc. n Corporation Corporation Ltd.
0.00438
Mean 0.001992 9 -0.000082 0.007449 -0.014355 -0.146323
0.00506
Variance 0.002704 0 0.006727 0.006674 0.014518 0.176663
150 Statistics for Business & Economics, 7th edition

Covariances:
General
3M Intel Potlatch Motors
  Company Alcoa Inc. Corporation Corporation Corporation
Alcoa Inc. 0.00153782        
0.0018436
Intel Corporation 0.00163165 0      
0.0019760
Potlatch Corporation 0.00012217 0 0.00144736    
General Motors - 0.0010337
Corporation 0.00005101 1 -0.00006588 0.00246545  
0.0070690
Sea Containers Ltd. 0.00075015 8 -0.00131221 -0.00151704 0.01077420

Let the portfolio growth be represented by variable W. The mean and variance for this
portfolio, W and  W2 , can be found using the following equations or by using
technology.

k k k 1 k
W   ai i ,  W2   ai2 i2  2 a a i j Cov ( X i , X j )
i 1 i 1 i 1 j i 1

Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum Q1

Portfolio Growth 60 0 -0.0245 0.0111 0.0862 0.0074 -0.4182 -0.0688

Variable Median Q3 Maximum

Portfolio Growth -0.0062 0.0303 0.1212

As previously shown, W = -0.0245 and  W = 0.0074.

2

5.105
Mean and variance for stock price growth:
General Motors International Potlatch Sea Containers Tata
  Corporation Business Machines Corporation Ltd. Communications
Mean -0.014355 0.004589 0.007449 -0.146323 0.022260
Variance 0.014518 0.002607 0.006674 0.176663 0.021645

Covariances:
General Motors International Potlatch Sea Containers
  Corporation Business Machines Corporation Ltd.
General Motors
Corporation        
International Business
Machines 0.00061410      
Potlatch Corporation 0.00246545 0.00097139    
 Chapter 5: Continuous Random Variables and Probability Distributions 151

Sea Containers Ltd. 0.01077420 0.00256087 -0.00151704  

Tata Communications 0.00108433 0.00149232 0.00626864 -0.00332721

Let the portfolio growth be represented by variable W. The mean and variance for this
portfolio, W and  W2 , can be found using the following equations or by using
technology.

k k k 1 k
W   ai i ,  W2   ai2 i2  2 a a i j Cov ( X i , X j )
i 1 i 1 i 1 j i 1

Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum Q1

Portfolio Growth 60 0 -0.0253 0.0133 0.1029 0.0106 -0.4573 -0.0763

Variable Median Q3 Maximum

Portfolio Growth -0.0048 0.0461 0.1378

As previously shown, W = -0.0253 and  W = 0.0106.

2

For the second portfolio (40% General Motors, 30% International Business
Machines, and 30% Tata Communications), we get the following output:
Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum

Portfolio Growth 60 0 0.00231 0.00929 0.07198 0.00518 -0.13973

Variable Q1 Median Q3 Maximum

Portfolio Growth -0.05795 0.01323 0.06036 0.19402

For the second portfolio, as previously shown, W = -0.00231 and  W =

2

0.00518.

The second portfolio has a higher mean and a lower variance. Since risk is directly
related to variance, the second portfolio would be the better choice.

5.106
Mean and variance for stock price growth:
AB Pentair Reliant TCF Financial 3M Restoration
  Volvo Inc. Energy Inc. Corporation Company Hardware Inc.
0.01959
Mean 2 0.007641 0.019031 -0.004087 0.001992 -0.013406
0.00480
Variance 5 0.006227 0.012686 0.004001 0.002704 0.027618
152 Statistics for Business & Economics, 7th edition

Covariances:
TCF
Reliant Financial 3M
  AB Volvo Pentair Inc. Energy Inc. Corporation Company
Pentair Inc. 0.00074848        
Reliant
Energy Inc. 0.00228027 0.00105381      
TCF Financial
Corporation -0.00001514 -0.00021080 -0.00041228    
3M Company 0.00099279 0.00087718 0.00031032 0.00072435  
Restoration
Hardware Inc. 0.00117969 0.00169410 0.00055922 -0.00041072 0.00204408

Let the portfolio growth be represented by variable W. The mean and variance for this
portfolio, W and  W , can be found using the following equations or by using
2

technology.

k k k 1 k
W   ai i ,  W2   ai2 i2  2 a a i j Cov ( X i , X j )
i 1 i 1 i 1 j i 1

Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum

Portfolio Growth 60 0 0.00513 0.00612 0.04740 0.00225 -0.16714

Variable Q1 Median Q3 Maximum

Portfolio Growth -0.02762 0.00631 0.04184 0.10438

As previously shown, W = 0.00513 and  W2 = 0.00225.

For the second portfolio (20% AB Volvo, 30% Pentair, 30% Reliant Energy, and
20% 3M Company), we get the following output:
Descriptive Statistics: Portfolio Growth

Variable N N* Mean SE Mean StDev Variance Minimum

Portfolio Growth 60 0 0.01232 0.00680 0.05270 0.00278 -0.15522

Variable Q1 Median Q3 Maximum

Portfolio Growth -0.02121 0.01386 0.05357 0.10539

For the second portfolio, as previously shown, W = 0.01232 and  W2 =

0.00278.

The second portfolio has a higher mean and a higher variance. Recall that risk is directly
related to variance. Since the second portfolio has a significantly larger mean and only a
slightly larger variance, it would be the better choice.