Business Statistics: A First Course

Chapter 6

The Normal Distribution

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-1
 Learning Objectives
In this chapter, you learn:
◼ To compute probabilities from the normal distribution
◼ How to use the normal distribution to solve business
problems
◼ To use the normal probability plot to determine whether
a set of data is approximately normally distributed

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-2
 Continuous Probability Distributions
◼ A continuous random variable is a variable that
can assume any value on a continuum (can
assume an uncountable number of values)
◼ thickness of an item
◼ time required to complete a task
◼ temperature of a solution
◼ height, in inches

◼ These can potentially take on any value

depending only on the ability to precisely and
accurately measure
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-3
 The Normal Distribution
◼ ‘Bell Shaped’
◼ Symmetrical
f(X)
◼ Mean, Median and Mode
are Equal
Location is determined by the σ
mean, μ X
Spread is determined by the μ
standard deviation, σ
Mean
The random variable has an = Median
infinite theoretical range: = Mode
+  to − 

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-4
 The Normal Distribution
Density Function

◼ The formula for the normal probability density function is

2
1  (X −μ) 
1 −  
2  
f(X) = e
2π
Where e = the mathematical constant approximated by 2.71828
π = the mathematical constant approximated by 3.14159
μ = the population mean
σ = the population standard deviation
X = any value of the continuous variable

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 Many Normal Distributions

By varying the parameters μ and σ, we obtain

different normal distributions

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 The Normal Distribution
Shape

f(X) Changing μ shifts the

distribution left or right.

Changing σ increases
or decreases the
σ spread.

μ X

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-7
 The Standardized Normal

◼ Any normal distribution (with any mean and

standard deviation combination) can be
transformed into the standardized normal
distribution (Z)

◼ Need to transform X units into Z units

◼ The standardized normal distribution (Z) has a

mean of 0 and a standard deviation of 1

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-8
 Translation to the Standardized
Normal Distribution

◼ Translate from X to the standardized normal

(the “Z” distribution) by subtracting the mean
of X and dividing by its standard deviation:

X −μ
Z=
σ
The Z distribution always has mean = 0 and
standard deviation = 1
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-9
 The Standardized
Normal Distribution

◼ Also known as the “Z” distribution

◼ Mean is 0
◼ Standard Deviation is 1
f(Z)

1
Z
0
Values above the mean have positive Z-values,
values below the mean have negative Z-values
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-10
 Example

◼ If X is distributed normally with mean of $100

and standard deviation of $50, the Z value
for X = $200 is
X − μ $200 − $100
Z= = = 2.0
σ $50
◼ This says that X = $200 is two standard
deviations (2 increments of $50 units) above
the mean of $100.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-11
 Comparing X and Z units

$100 $200 $X (μ = $100, σ = $50)

0 2.0 Z (μ = 0, σ = 1)
Note that the shape of the distribution is the same,
only the scale has changed. We can express the
problem in the original units (X in dollars) or in
standardized units (Z)
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-12
 Finding Normal Probabilities

Probability is measured by the area

under the curve
f(X) P (a ≤ X ≤ b)
= P (a < X < b)
(Note that the
probability of any
individual value is zero)

a b X

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-13
 Probability as
Area Under the Curve
The total area under the curve is 1.0, and the curve is
symmetric, so half is above the mean, half is below

f(X) P( −  X  μ) = 0.5
P(μ  X   ) = 0.5

0.5 0.5

μ X
P( −  X   ) = 1.0
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-14
 The Standardized Normal Table

◼ The Cumulative Standardized Normal table

in the textbook (Appendix table E.2) gives the
probability less than a desired value of Z (i.e.,
from negative infinity to Z)

0.9772
Example:
P(Z < 2.00) = 0.9772

0 2.00 Z

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 The Standardized Normal Table
(continued)

The column gives the value of

Z to the second decimal point
Z 0.00 0.01 0.02 …

The row shows 0.0

the value of Z 0.1
. The value within the
to the first .
decimal point . table gives the
2.0 .9772 probability from Z = − 
up to the desired Z-
value
2.0
P(Z < 2.00) = 0.9772

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-16
 General Procedure for
Finding Normal Probabilities

To find P(a < X < b) when X is

distributed normally:

◼ Draw the normal curve for the problem in

terms of X

◼ Translate X-values to Z-values

◼ Use the Standardized Normal Table

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-17
 Finding Normal Probabilities
◼ Let X represent the time it takes (in seconds)
to download an image file from the internet.
◼ Suppose X is normal with a mean of 18.0
seconds and a standard deviation of 5.0
seconds. Find P(X < 18.6)

X
18.0
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 18.6 Chap 6-18
 Finding Normal Probabilities
(continued)
◼ Let X represent the time it takes, in seconds to download an image file
from the internet.
◼ Suppose X is normal with a mean of 18.0 seconds and a standard
deviation of 5.0 seconds. Find P(X < 18.6)

X − μ 18.6 − 18.0
Z= = = 0.12
σ 5.0

μ = 18 μ=0
σ=5 σ=1

18 18.6 X 0 0.12 Z

P(X < 18.6) P(Z < 0.12)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-19
 Solution: Finding P(Z < 0.12)

Standardized Normal Probability P(X < 18.6)

Table (Portion) = P(Z < 0.12)
Z .00 .01 .02 0.5478
0.0 .5000 .5040 .5080

0.1 .5398 .5438 .5478

0.2 .5793 .5832 .5871
Z
0.00
0.3 .6179 .6217 .6255
0.12

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-20
 Finding Normal
Upper Tail Probabilities

◼ Suppose X is normal with mean 18.0

and standard deviation 5.0.
◼ Now Find P(X > 18.6)

X
18.0
18.6
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-21
 Finding Normal
Upper Tail Probabilities
(continued)

◼ Now Find P(X > 18.6)…

P(X > 18.6) = P(Z > 0.12) = 1.0 - P(Z ≤ 0.12)
= 1.0 - 0.5478 = 0.4522

0.5478
1.000 1.0 - 0.5478
= 0.4522

Z Z
0 0
0.12 0.12
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-22
 Finding a Normal Probability
Between Two Values

◼ Suppose X is normal with mean 18.0 and

standard deviation 5.0. Find P(18 < X < 18.6)

Calculate Z-values:

X − μ 18 − 18
Z= = =0
σ 5
18 18.6 X
X − μ 18.6 − 18 0 0.12 Z
Z= = = 0.12
σ 5 P(18 < X < 18.6)
= P(0 < Z < 0.12)
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-23
 Solution: Finding P(0 < Z < 0.12)

Standardized Normal Probability P(18 < X < 18.6)

Table (Portion) = P(0 < Z < 0.12)
= P(Z < 0.12) – P(Z ≤ 0)
Z .00 .01 .02 = 0.5478 - 0.5000 = 0.0478
0.0 .5000 .5040 .5080 0.0478
0.5000
0.1 .5398 .5438 .5478
0.2 .5793 .5832 .5871

0.3 .6179 .6217 .6255 Z

0.00
0.12
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-24
 Probabilities in the Lower Tail

◼ Suppose X is normal with mean 18.0

and standard deviation 5.0.
◼ Now Find P(17.4 < X < 18)

X
18.0
17.4

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-25
 Probabilities in the Lower Tail
(continued)

Now Find P(17.4 < X < 18)…

P(17.4 < X < 18)
= P(-0.12 < Z < 0) 0.0478
= P(Z < 0) – P(Z ≤ -0.12)
= 0.5000 - 0.4522 = 0.0478 0.4522

The Normal distribution is

symmetric, so this probability
17.4 18.0 X
is the same as P(0 < Z < 0.12) Z
-0.12 0

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-26
 Given a Normal Probability
Find the X Value

◼ Steps to find the X value for a known

probability:
1. Find the Z-value for the known probability
2. Convert to X units using the formula:

X = μ + Zσ

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-27
 Finding the X value for a
Known Probability
(continued)

Example:
◼ Let X represent the time it takes (in seconds) to
download an image file from the internet.
◼ Suppose X is normal with mean 18.0 and standard
deviation 5.0
◼ Find X such that 20% of download times are less than
X.
0.2000

? 18.0 X
? 0 Z
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-28
 Find the Z-value for
20% in the Lower Tail

1. Find the Z-value for the known probability

Standardized Normal Probability ◼ 20% area in the lower
Table (Portion) tail is consistent with a
Z … .03 .04 .05 Z-value of -0.84

-0.9 … .1762 .1736 .1711

0.2000
-0.8 … .2033 .2005 .1977
-0.7 … .2327 .2296 .2266
? 18.0 X
-0.84 0 Z

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-29
 Finding the X value

2. Convert to X units using the formula:

X = μ + Zσ
= 18.0 + (−0.84)5.0
= 13.8

So 20% of the values from a distribution

with mean 18.0 and standard deviation
5.0 are less than 13.80

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-30
 Using Excel With The Normal
Distribution
Finding Normal Probabilities

Finding X Given a Probability

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-31
 Evaluating Normality
◼ Not all continuous distributions are normal
◼ It is important to evaluate how well the data set is
approximated by a normal distribution.
◼ Normally distributed data should approximate the
theoretical normal distribution:
◼ The normal distribution is bell shaped (symmetrical)
where the mean is equal to the median.
◼ The empirical rule applies to the normal distribution.
◼ The interquartile range of a normal distribution is 1.33
standard deviations.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-32
 Evaluating Normality
(continued)
Comparing data characteristics to theoretical
properties
◼ Construct charts or graphs
◼ For small- or moderate-sized data sets, construct a stem-and-leaf
display or a boxplot to check for symmetry
◼ For large data sets, does the histogram or polygon appear bell-
shaped?
◼ Compute descriptive summary measures
◼ Do the mean, median and mode have similar values?
◼ Is the interquartile range approximately 1.33 σ?
◼ Is the range approximately 6 σ?

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-33
 Evaluating Normality
(continued)

Comparing data characteristics to theoretical

properties
◼ Observe the distribution of the data set
◼ Do approximately 2/3 of the observations lie within mean ±1
standard deviation?
◼ Do approximately 80% of the observations lie within mean
±1.28 standard deviations?
◼ Do approximately 95% of the observations lie within mean ±2
standard deviations?
◼ Evaluate normal probability plot
◼ Is the normal probability plot approximately linear (i.e. a straight
line) with positive slope?

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 Constructing A Quantile-Quantile
Normal Probability Plot

◼ Normal probability plot

◼ Arrange data into ordered array
◼ Find corresponding standardized normal quantile
values (Z)
◼ Plot the pairs of points with observed data values (X)
on the vertical axis and the standardized normal
quantile values (Z) on the horizontal axis
◼ Evaluate the plot for evidence of linearity

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-35
 The Quantile-Quantile Normal
Probability Plot Interpretation

A quantile-quantile normal
probability plot for data from a
normal distribution will be
approximately linear:
X
90

60

30

-2 -1 0 1 2 Z

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 Quantile-Quantile Normal
Probability Plot Interpretation
(continued)

Left-Skewed Right-Skewed
X 90 X 90
60 60
30 30
-2 -1 0 1 2 Z -2 -1 0 1 2 Z

Rectangular
X 90 Nonlinear plots
indicate a deviation
60
from normality
30
-2 -1 0 1 2 Z
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 Evaluating Normality
An Example: Bond Funds Returns

The boxplot is skewed to

the right. (The normal
distribution is symmetric.)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-38
 Evaluating Normality
An Example: Bond Funds Returns
(continued)
• The mean (7.1641) is greater than the median
Descriptive Statistics (6.4). (In a normal distribution the mean and
median are equal.)
• The interquartile range of 7.4 is approximately
1.21 standard deviations. (In a normal
distribution the interquartile range is 1.33
standard deviations.)
• The range of 40.8 is equal to 6.70 standard
deviations. (In a normal distribution the range is
6 standard deviations.)
• 73.91% of the observations are within 1
standard deviation of the mean. (In a normal
distribution this percentage is 68.26%.
• 85.33% of the observations are within 1.28
standard deviations of the mean. (In a normal
distribution this percentage is 80%.)
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-39
 Evaluating Normality
An Example: Bond Funds Returns
(continued)
• 96.20% of the returns are within 2 standard
Descriptive Statistics deviations of the mean. (In a normal
distribution, 95.44% of the values lie within 2
standard deviations of the mean.)
• The skewness statistic is 0.9085 and the
kurtosis statistic is 2.456. (In a normal
distribution each of these statistics equals zero.)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-40
 Evaluating Normality
An Example: Bond Funds Returns
(continued)

Quantile-Quantile Normal Probability Plot From Excel

Plot is not a straight

line and shows the
distribution is skewed
to the right. (The
normal distribution
appears as a straight
line.)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-41
 Evaluating Normality
An Example: Bond Funds Returns
(continued)

Normal Probability Plot From Minitab

Plot is not a straight

line, rises quickly in
the beginning, rises
slowly at the end and
shows the distribution
is skewed to the
right.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 6-42
 Evaluating Normality
An Example: Mutual Funds Returns
(continued)

◼ Conclusions
◼ The returns are right-skewed
◼ The returns have more values within 1 standard
deviation of the mean than expected
◼ The range is larger than expected (mostly due to the
outlier at 32)
◼ Normal probability plot is not a straight line
◼ Overall, this data set greatly differs from the
theoretical properties of the normal distribution

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