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(University of Brescia) 1 / 42

Main topics

1

Linear Programming

2

Statistics

Descriptive Statistics

Linear Regression

Probability

Inference

(University of Brescia) 2 / 42

Linear Programming

General statements

Managers often have to make decisions on how best to allocate scarce

resources among competing activities

Limited resources are used to manufacture various products, or

provide services

Typically, there are many dierent ways to produce these products or

services. Management's problem is to nd the best way, given the

limitations of the resources

Linear programming (LP) is a mathematical technique designed to

help in the planning and allocation of the resources

Both the objective function and the constraints of an LP problem

must be linear

(University of Brescia) 3 / 42

Linear Programming

General statements

Managers often have to make decisions on how best to allocate scarce

resources among competing activities

Limited resources are used to manufacture various products, or

provide services

Typically, there are many dierent ways to produce these products or

services. Management's problem is to nd the best way, given the

limitations of the resources

Linear programming (LP) is a mathematical technique designed to

help in the planning and allocation of the resources

Both the objective function and the constraints of an LP problem

must be linear

(University of Brescia) 3 / 42

Linear Programming

General statements

Managers often have to make decisions on how best to allocate scarce

resources among competing activities

Limited resources are used to manufacture various products, or

provide services

Typically, there are many dierent ways to produce these products or

services. Management's problem is to nd the best way, given the

limitations of the resources

Linear programming (LP) is a mathematical technique designed to

help in the planning and allocation of the resources

Both the objective function and the constraints of an LP problem

must be linear

(University of Brescia) 3 / 42

Linear Programming

General statements

Managers often have to make decisions on how best to allocate scarce

resources among competing activities

Limited resources are used to manufacture various products, or

provide services

Typically, there are many dierent ways to produce these products or

services. Management's problem is to nd the best way, given the

limitations of the resources

Linear programming (LP) is a mathematical technique designed to

help in the planning and allocation of the resources

Both the objective function and the constraints of an LP problem

must be linear

(University of Brescia) 3 / 42

Linear Programming

General statements

Managers often have to make decisions on how best to allocate scarce

resources among competing activities

Limited resources are used to manufacture various products, or

provide services

Typically, there are many dierent ways to produce these products or

services. Management's problem is to nd the best way, given the

limitations of the resources

Linear programming (LP) is a mathematical technique designed to

help in the planning and allocation of the resources

Both the objective function and the constraints of an LP problem

must be linear

(University of Brescia) 3 / 42

Linear Programming

General statements

An LP problem consists in

an objective function, typically a prot to maximize or a cost to

minimize

constraints due to the fact that scarce resources imply limitations to

the courses of actions available

A typical application of LP is the search for the mix of nancial

instruments driving to the highest possible return

Non linear programming involves an objective function

and/constraints which are non linear

(University of Brescia) 4 / 42

Linear Programming

General statements

An LP problem consists in

an objective function, typically a prot to maximize or a cost to

minimize

constraints due to the fact that scarce resources imply limitations to

the courses of actions available

A typical application of LP is the search for the mix of nancial

instruments driving to the highest possible return

Non linear programming involves an objective function

and/constraints which are non linear

(University of Brescia) 4 / 42

Linear Programming

General statements

An LP problem consists in

an objective function, typically a prot to maximize or a cost to

minimize

constraints due to the fact that scarce resources imply limitations to

the courses of actions available

A typical application of LP is the search for the mix of nancial

instruments driving to the highest possible return

Non linear programming involves an objective function

and/constraints which are non linear

(University of Brescia) 4 / 42

Linear Programming

General statements

An LP problem consists in

an objective function, typically a prot to maximize or a cost to

minimize

constraints due to the fact that scarce resources imply limitations to

the courses of actions available

A typical application of LP is the search for the mix of nancial

instruments driving to the highest possible return

Non linear programming involves an objective function

and/constraints which are non linear

(University of Brescia) 4 / 42

Linear Programming

General statements

An LP problem consists in

an objective function, typically a prot to maximize or a cost to

minimize

constraints due to the fact that scarce resources imply limitations to

the courses of actions available

A typical application of LP is the search for the mix of nancial

instruments driving to the highest possible return

Non linear programming involves an objective function

and/constraints which are non linear

(University of Brescia) 4 / 42

Linear Programming

Adopting the notation of matrix algebra a problem of linear programming

(L.P.) in the canonical form can be written in the following way:

8

>

>

<

>

>

:

max c

T

x

s.t.

Ax _ b

x _ 0

where z = c

T

x is the objective function to be maximized,

x = [x

1

, x

2

, .., x

n

] R

n

is the vector of decision variables, b R

m

is a

vector of known constants and c R

n

is a vector of coecients.

(University of Brescia) 5 / 42

Linear Programming

An L.P. problem can often appear in a dierent form than the canonical

one. However it is always possible to turn it in the canonical form. A

maximization problem can be turned into a minimization one observing

that:

min z = max (z)

and viceversa

max z = min (z) .

Besides, all the contraints of the type Ax _ b can be rewritten as

Ax _ b; equality constraints Ax = b can be replaced with two

inequality contraints, imposing that at the same time Ax _ b and

Ax _ b.

(University of Brescia) 6 / 42

Linear Programming

Denition

An admissible solution to an L.P. problem is any vector x R

n

satisfying

the system of constraints. The set of all the admissible solutions, which

usually named S

a

is dened as S

a

= x R

n

[x _ 0, Ax _ b

Denition

An optimal solution to an L.P. problem is an admissible solution letting

the objective function to assume the maximum nite value.

(University of Brescia) 7 / 42

Linear Programming - example

In this video we try to solve gracally the following optimization probelm:

Link:

http://www.engineeringvideos.net/optimization/optimization.php

(University of Brescia) 8 / 42

Excel Solver

Excel Solver is a powerful tool for analyzing and solving various

types of linear programming problems which contain many variables

and constraints

It can analyze and solve linear programming (LP) problems, as well

as other kinds of mathematical programming problems (non-linear,

integer, mixed linear-integer,...).

Because of its algorithmic nature, Excel solver may not always

converge to the best solution

the result is inuenced by options such as the maximum time allowed,

the maximum number of iterations allowed, the size of the residual

error, etc.

Excel solver provides default settings for all options, which are

appropriate for most problems.

(University of Brescia) 9 / 42

Excel Solver

Excel Solver is a powerful tool for analyzing and solving various

types of linear programming problems which contain many variables

and constraints

It can analyze and solve linear programming (LP) problems, as well

as other kinds of mathematical programming problems (non-linear,

integer, mixed linear-integer,...).

Because of its algorithmic nature, Excel solver may not always

converge to the best solution

the result is inuenced by options such as the maximum time allowed,

the maximum number of iterations allowed, the size of the residual

error, etc.

Excel solver provides default settings for all options, which are

appropriate for most problems.

(University of Brescia) 9 / 42

Excel Solver

Excel Solver is a powerful tool for analyzing and solving various

types of linear programming problems which contain many variables

and constraints

It can analyze and solve linear programming (LP) problems, as well

as other kinds of mathematical programming problems (non-linear,

integer, mixed linear-integer,...).

Because of its algorithmic nature, Excel solver may not always

converge to the best solution

the result is inuenced by options such as the maximum time allowed,

the maximum number of iterations allowed, the size of the residual

error, etc.

Excel solver provides default settings for all options, which are

appropriate for most problems.

(University of Brescia) 9 / 42

Excel Solver

Excel Solver is a powerful tool for analyzing and solving various

types of linear programming problems which contain many variables

and constraints

It can analyze and solve linear programming (LP) problems, as well

as other kinds of mathematical programming problems (non-linear,

integer, mixed linear-integer,...).

Because of its algorithmic nature, Excel solver may not always

converge to the best solution

the result is inuenced by options such as the maximum time allowed,

the maximum number of iterations allowed, the size of the residual

error, etc.

Excel solver provides default settings for all options, which are

appropriate for most problems.

(University of Brescia) 9 / 42

Excel Solver

Excel Solver is a powerful tool for analyzing and solving various

types of linear programming problems which contain many variables

and constraints

It can analyze and solve linear programming (LP) problems, as well

as other kinds of mathematical programming problems (non-linear,

integer, mixed linear-integer,...).

Because of its algorithmic nature, Excel solver may not always

converge to the best solution

the result is inuenced by options such as the maximum time allowed,

the maximum number of iterations allowed, the size of the residual

error, etc.

Excel solver provides default settings for all options, which are

appropriate for most problems.

(University of Brescia) 9 / 42

Excel Solver

Excel Solver (i.e. Risolutore) must be activated, if it is not already

active

To activate the Analysis ToolPak, choose the Tools -> Data Analysis

command (in Excel 2003) or click on Risolutore button (in Excel

2007).

Figure: Excel 2007

(University of Brescia) 10 / 42

Excel Solver

Excel Solver (i.e. Risolutore) must be activated, if it is not already

active

To activate the Analysis ToolPak, choose the Tools -> Data Analysis

command (in Excel 2003) or click on Risolutore button (in Excel

2007).

Figure: Excel 2007

(University of Brescia) 10 / 42

Excel Solver

The Solver interface to enter all the parameters of an L.P. problem:

- the cell containing the objective function

- if the user wants to solve a max, min or equal to problem

- enter the contraints

Figure: Solver interface

(University of Brescia) 11 / 42

Linear Programming

Case: Acme Company

Among other products, Acme produces leg muscle vitamins (V) and

jet-propelled tennis shoes (S)

The Acme Company products.

(University of Brescia) 12 / 42

Linear Programming

Case: Acme Company

Acme uses Excel solver to for the following LP problem:

maximize its total prot from assembling and packaging boxes of V

and S;

decision variable is the number of units of V and S to be produced;

subject to the constraints on the use of its producing factors (plants

and workforce have a limited productivity).

(University of Brescia) 13 / 42

Linear Programming

Case: Acme Company

Acme uses Excel solver to for the following LP problem:

maximize its total prot from assembling and packaging boxes of V

and S;

decision variable is the number of units of V and S to be produced;

subject to the constraints on the use of its producing factors (plants

and workforce have a limited productivity).

(University of Brescia) 13 / 42

Linear Programming

Case: Acme Company

Acme uses Excel solver to for the following LP problem:

maximize its total prot from assembling and packaging boxes of V

and S;

decision variable is the number of units of V and S to be produced;

subject to the constraints on the use of its producing factors (plants

and workforce have a limited productivity).

(University of Brescia) 13 / 42

Linear Programming

Acme Company: The LP mathematical formulation

Let us see the mathematical formulation of the objective function and

constraints. The decision variables appearing both in the objective

function and the constraints are

x

1

, which is the number of boxes of V,

x

2

, which is the number of boxes of S

The prot to be maximized is

Z = 2x

1

+ 3x

2

,

where

2 is the unit prot of a box of V,

3 is the unit prot of a box of S

(University of Brescia) 14 / 42

Linear Programming

Acme Company: The LP mathematical formulation

Let us see the mathematical formulation of the objective function and

constraints. The decision variables appearing both in the objective

function and the constraints are

x

1

, which is the number of boxes of V,

x

2

, which is the number of boxes of S

The prot to be maximized is

Z = 2x

1

+ 3x

2

,

where

2 is the unit prot of a box of V,

3 is the unit prot of a box of S

(University of Brescia) 14 / 42

Linear Programming

Acme Company: The LP mathematical formulation

Let us see the mathematical formulation of the objective function and

constraints. The decision variables appearing both in the objective

function and the constraints are

x

1

, which is the number of boxes of V,

x

2

, which is the number of boxes of S

The prot to be maximized is

Z = 2x

1

+ 3x

2

,

where

2 is the unit prot of a box of V,

3 is the unit prot of a box of S

(University of Brescia) 14 / 42

Linear Programming

Acme Company: The LP mathematical formulation

Let us see the mathematical formulation of the objective function and

constraints. The decision variables appearing both in the objective

function and the constraints are

x

1

, which is the number of boxes of V,

x

2

, which is the number of boxes of S

The prot to be maximized is

Z = 2x

1

+ 3x

2

,

where

2 is the unit prot of a box of V,

3 is the unit prot of a box of S

(University of Brescia) 14 / 42

Linear Programming

Acme Company: The LP mathematical formulation

Let us see the mathematical formulation of the objective function and

constraints. The decision variables appearing both in the objective

function and the constraints are

x

1

, which is the number of boxes of V,

x

2

, which is the number of boxes of S

The prot to be maximized is

Z = 2x

1

+ 3x

2

,

where

2 is the unit prot of a box of V,

3 is the unit prot of a box of S

(University of Brescia) 14 / 42

Linear Programming

Acme Company: The LP mathematical formulation

Let us see the mathematical formulation of the objective function and

constraints. The decision variables appearing both in the objective

function and the constraints are

x

1

, which is the number of boxes of V,

x

2

, which is the number of boxes of S

The prot to be maximized is

Z = 2x

1

+ 3x

2

,

where

2 is the unit prot of a box of V,

3 is the unit prot of a box of S

(University of Brescia) 14 / 42

Linear Programming

Acme Company: The LP mathematical formulation

The assembly time constraint is

9x

1

+ 15x

2

_ 108, 000

where

9 is the number of minutes required to assemble a box of V,

15 is the number of minutes required to assemble a box of S,

108, 000 is the maximum number of minutes available in assembling

The packaging time constraint is

11x

1

+ 5x

2

_ 108, 000

where

11 is the number of minutes required to package a box of V,

5 is the number of minutes required to package a box of S,

108, 000 is the maximum number of minutes available in packaging

(University of Brescia) 15 / 42

Linear Programming

Acme Company: The LP mathematical formulation

The assembly time constraint is

9x

1

+ 15x

2

_ 108, 000

where

9 is the number of minutes required to assemble a box of V,

15 is the number of minutes required to assemble a box of S,

108, 000 is the maximum number of minutes available in assembling

The packaging time constraint is

11x

1

+ 5x

2

_ 108, 000

where

11 is the number of minutes required to package a box of V,

5 is the number of minutes required to package a box of S,

108, 000 is the maximum number of minutes available in packaging

(University of Brescia) 15 / 42

Linear Programming

Acme Company: The LP mathematical formulation

The assembly time constraint is

9x

1

+ 15x

2

_ 108, 000

where

9 is the number of minutes required to assemble a box of V,

15 is the number of minutes required to assemble a box of S,

108, 000 is the maximum number of minutes available in assembling

The packaging time constraint is

11x

1

+ 5x

2

_ 108, 000

where

11 is the number of minutes required to package a box of V,

5 is the number of minutes required to package a box of S,

108, 000 is the maximum number of minutes available in packaging

(University of Brescia) 15 / 42

Linear Programming

Acme Company: The LP mathematical formulation

The assembly time constraint is

9x

1

+ 15x

2

_ 108, 000

where

9 is the number of minutes required to assemble a box of V,

15 is the number of minutes required to assemble a box of S,

108, 000 is the maximum number of minutes available in assembling

The packaging time constraint is

11x

1

+ 5x

2

_ 108, 000

where

11 is the number of minutes required to package a box of V,

5 is the number of minutes required to package a box of S,

108, 000 is the maximum number of minutes available in packaging

(University of Brescia) 15 / 42

Linear Programming

Acme Company: The LP mathematical formulation

The assembly time constraint is

9x

1

+ 15x

2

_ 108, 000

where

9 is the number of minutes required to assemble a box of V,

15 is the number of minutes required to assemble a box of S,

108, 000 is the maximum number of minutes available in assembling

The packaging time constraint is

11x

1

+ 5x

2

_ 108, 000

where

11 is the number of minutes required to package a box of V,

5 is the number of minutes required to package a box of S,

108, 000 is the maximum number of minutes available in packaging

(University of Brescia) 15 / 42

Linear Programming

Acme Company: The LP mathematical formulation

The assembly time constraint is

9x

1

+ 15x

2

_ 108, 000

where

9 is the number of minutes required to assemble a box of V,

15 is the number of minutes required to assemble a box of S,

108, 000 is the maximum number of minutes available in assembling

The packaging time constraint is

11x

1

+ 5x

2

_ 108, 000

where

11 is the number of minutes required to package a box of V,

5 is the number of minutes required to package a box of S,

108, 000 is the maximum number of minutes available in packaging

(University of Brescia) 15 / 42

Linear Programming

Acme Company: The LP mathematical formulation

The assembly time constraint is

9x

1

+ 15x

2

_ 108, 000

where

9 is the number of minutes required to assemble a box of V,

15 is the number of minutes required to assemble a box of S,

108, 000 is the maximum number of minutes available in assembling

The packaging time constraint is

11x

1

+ 5x

2

_ 108, 000

where

11 is the number of minutes required to package a box of V,

5 is the number of minutes required to package a box of S,

108, 000 is the maximum number of minutes available in packaging

(University of Brescia) 15 / 42

Linear Programming

Acme Company: The LP mathematical formulation

The assembly time constraint is

9x

1

+ 15x

2

_ 108, 000

where

9 is the number of minutes required to assemble a box of V,

15 is the number of minutes required to assemble a box of S,

108, 000 is the maximum number of minutes available in assembling

The packaging time constraint is

11x

1

+ 5x

2

_ 108, 000

where

11 is the number of minutes required to package a box of V,

5 is the number of minutes required to package a box of S,

108, 000 is the maximum number of minutes available in packaging

(University of Brescia) 15 / 42

Linear Programming

Acme Company: The LP mathematical formulation

The integer constraint is

x

1

, x

2

Z

+

' 0 ,

and means that the numbers of boxes must be non negative and

integer

(University of Brescia) 16 / 42

Linear Programming

Acme Company: The LP Excel Solver formulation

The following picture shows the input data and the formulas required

to run the Excel Solver

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

A B C D E F G H I

Acme Company

Assembly Packaging

Time (min) Time (min) Profit Changing Cells

leg muscle vitamins (V) 9 11 2 9'000

jet-propelled tennis shoes (S) 15 5 3 1'800

Maximum time (min) 108'000 108'000

Actual time (min) 108'000 108'000

Target cell

23'400

Input data

Formulas

Cell Formula Copied to

C10 C6*$G6 + C7*$G7 D10

F12 E6*G6 + E7*G7

Solver Parameters

F12

max

G6:G7

C10 <= C9 = Assembly time constraint

D10 <= D9 = Packaging time constraint

G6:G7 >= 0 = Decision variables must be positive

G6:G7 = int = Decision variables must be integer

by modifying Changing Cells

subject to Constraints

Constraints

User input cells are shaded

Set Target Cell

equal to

The Acme Company problem solved with Excel Solver.

(University of Brescia) 17 / 42

Linear Programming

Acme Company: The LP Excel Solver formulation

Changing cells: cells containing the decision variables. The changing

cells are usually left blank or are assigned zero values

Target cell: cell containing the objective function in terms of the

decision variables

Constraints: cells containing the limits which are imposed upon

decision variables

(University of Brescia) 18 / 42

Linear Programming

Acme Company: The LP Excel Solver formulation

Changing cells: cells containing the decision variables. The changing

cells are usually left blank or are assigned zero values

Target cell: cell containing the objective function in terms of the

decision variables

Constraints: cells containing the limits which are imposed upon

decision variables

(University of Brescia) 18 / 42

Linear Programming

Acme Company: The LP Excel Solver formulation

Changing cells: cells containing the decision variables. The changing

cells are usually left blank or are assigned zero values

Target cell: cell containing the objective function in terms of the

decision variables

Constraints: cells containing the limits which are imposed upon

decision variables

(University of Brescia) 18 / 42

Linear Programming

Acme Company: Excel Solver at work

Activate the Excel Solver. Select Tools -> Solver to display the Solver

Parameters dialog box and follow what is written in the spreadsheet

Click the `Solve' button to start Solver

Select the `Keep Solver Solution' option on the `Solver Results' dialog

box in order to store the answer in the worksheet

For most problems, the default settings in the `Solver Options' box

are appropriate

The answer is 9, 000 boxes of V and 1, 800 boxes of S, giving a

maximum prot of 23, 400. The actual amount of time used in each

department is 1, 800 hours, equalling the maximum time available

(University of Brescia) 19 / 42

Linear Programming

Acme Company: Excel Solver at work

Activate the Excel Solver. Select Tools -> Solver to display the Solver

Parameters dialog box and follow what is written in the spreadsheet

Click the `Solve' button to start Solver

Select the `Keep Solver Solution' option on the `Solver Results' dialog

box in order to store the answer in the worksheet

For most problems, the default settings in the `Solver Options' box

are appropriate

The answer is 9, 000 boxes of V and 1, 800 boxes of S, giving a

maximum prot of 23, 400. The actual amount of time used in each

department is 1, 800 hours, equalling the maximum time available

(University of Brescia) 19 / 42

Linear Programming

Acme Company: Excel Solver at work

Activate the Excel Solver. Select Tools -> Solver to display the Solver

Parameters dialog box and follow what is written in the spreadsheet

Click the `Solve' button to start Solver

Select the `Keep Solver Solution' option on the `Solver Results' dialog

box in order to store the answer in the worksheet

For most problems, the default settings in the `Solver Options' box

are appropriate

The answer is 9, 000 boxes of V and 1, 800 boxes of S, giving a

maximum prot of 23, 400. The actual amount of time used in each

department is 1, 800 hours, equalling the maximum time available

(University of Brescia) 19 / 42

Linear Programming

Acme Company: Excel Solver at work

Activate the Excel Solver. Select Tools -> Solver to display the Solver

Parameters dialog box and follow what is written in the spreadsheet

Click the `Solve' button to start Solver

Select the `Keep Solver Solution' option on the `Solver Results' dialog

box in order to store the answer in the worksheet

For most problems, the default settings in the `Solver Options' box

are appropriate

The answer is 9, 000 boxes of V and 1, 800 boxes of S, giving a

maximum prot of 23, 400. The actual amount of time used in each

department is 1, 800 hours, equalling the maximum time available

(University of Brescia) 19 / 42

Linear Programming

Acme Company: Excel Solver at work

Activate the Excel Solver. Select Tools -> Solver to display the Solver

Parameters dialog box and follow what is written in the spreadsheet

Click the `Solve' button to start Solver

Select the `Keep Solver Solution' option on the `Solver Results' dialog

box in order to store the answer in the worksheet

For most problems, the default settings in the `Solver Options' box

are appropriate

The answer is 9, 000 boxes of V and 1, 800 boxes of S, giving a

maximum prot of 23, 400. The actual amount of time used in each

department is 1, 800 hours, equalling the maximum time available

(University of Brescia) 19 / 42

Main topics

1

Linear Programming

2

Statistics

Descriptive Statistics

Linear Regression

Probability

Inference

(University of Brescia) 20 / 42

Statistics

Introduction and examples

The primary role of statistics is to provide managers with

mathematical tools that will help them to organize and analyze the

information data in an eective and meaningful way

The easiest method of organizing data is to construct a frequency

distribution table using classes. Usually a class is an interval

One possible analysis on data is to test for the dierence among

groups of data. The test can concentrate on the measures of position

(mode, median, mean) and dispersion (range, standard deviation,

variance)

(University of Brescia) 21 / 42

Statistics

Introduction and examples

The primary role of statistics is to provide managers with

mathematical tools that will help them to organize and analyze the

information data in an eective and meaningful way

The easiest method of organizing data is to construct a frequency

distribution table using classes. Usually a class is an interval

One possible analysis on data is to test for the dierence among

groups of data. The test can concentrate on the measures of position

(mode, median, mean) and dispersion (range, standard deviation,

variance)

(University of Brescia) 21 / 42

Statistics

Introduction and examples

The primary role of statistics is to provide managers with

mathematical tools that will help them to organize and analyze the

information data in an eective and meaningful way

The easiest method of organizing data is to construct a frequency

distribution table using classes. Usually a class is an interval

One possible analysis on data is to test for the dierence among

groups of data. The test can concentrate on the measures of position

(mode, median, mean) and dispersion (range, standard deviation,

variance)

(University of Brescia) 21 / 42

Statistics

Wheelie Company: Excel FREQUENCY function and ChartWizard

Consider the 100 numbers representing the length (in 100s

kilometers) travelled by bicycle tyres before one tyre of the couple

failed to meet minimum Wheelie Company standards

The Wheelie Company tyres.

We can organize the tyres survivorship into a frequency distribution.

The rst task is to convert the raw data into a number of groups or

classes, and then count the number of values which fall into each class

(University of Brescia) 22 / 42

Statistics

Wheelie Company: Excel FREQUENCY function and ChartWizard

Consider the 100 numbers representing the length (in 100s

kilometers) travelled by bicycle tyres before one tyre of the couple

failed to meet minimum Wheelie Company standards

The Wheelie Company tyres.

We can organize the tyres survivorship into a frequency distribution.

The rst task is to convert the raw data into a number of groups or

classes, and then count the number of values which fall into each class

(University of Brescia) 22 / 42

Statistics

Wheelie Company: Excel FREQUENCY function and ChartWizard

The FREQUENCY function needs two input ranges: the range of

data (RD) and the range of classes upper bounds (RCUB)

Given the minimum, m, and the maximum, M, of data, the class

width, cw, is

cw =

M m

N

,

where N is the desired number of classes. Each upper bound ub

i

,

i = 1, ..., N, is calculated as

ub

i

= m +i cw

Select N vertically adjacent cells, write

"=FREQUENCY(RD;RCUB)", then press "CTRL+ALT+ENTER"

Use ChartWizard to plot the frequency distribution

(University of Brescia) 23 / 42

Statistics

Wheelie Company: Excel FREQUENCY function and ChartWizard

The FREQUENCY function needs two input ranges: the range of

data (RD) and the range of classes upper bounds (RCUB)

Given the minimum, m, and the maximum, M, of data, the class

width, cw, is

cw =

M m

N

,

where N is the desired number of classes. Each upper bound ub

i

,

i = 1, ..., N, is calculated as

ub

i

= m +i cw

Select N vertically adjacent cells, write

"=FREQUENCY(RD;RCUB)", then press "CTRL+ALT+ENTER"

Use ChartWizard to plot the frequency distribution

(University of Brescia) 23 / 42

Statistics

Wheelie Company: Excel FREQUENCY function and ChartWizard

The FREQUENCY function needs two input ranges: the range of

data (RD) and the range of classes upper bounds (RCUB)

Given the minimum, m, and the maximum, M, of data, the class

width, cw, is

cw =

M m

N

,

where N is the desired number of classes. Each upper bound ub

i

,

i = 1, ..., N, is calculated as

ub

i

= m +i cw

Select N vertically adjacent cells, write

"=FREQUENCY(RD;RCUB)", then press "CTRL+ALT+ENTER"

Use ChartWizard to plot the frequency distribution

(University of Brescia) 23 / 42

Statistics

Wheelie Company: Excel FREQUENCY function and ChartWizard

The FREQUENCY function needs two input ranges: the range of

data (RD) and the range of classes upper bounds (RCUB)

Given the minimum, m, and the maximum, M, of data, the class

width, cw, is

cw =

M m

N

,

where N is the desired number of classes. Each upper bound ub

i

,

i = 1, ..., N, is calculated as

ub

i

= m +i cw

Select N vertically adjacent cells, write

"=FREQUENCY(RD;RCUB)", then press "CTRL+ALT+ENTER"

Use ChartWizard to plot the frequency distribution

(University of Brescia) 23 / 42

Linear regression

Introduction

Among the models used to represent phenomena, the regression

models play a major role

Regression models allow the specication of a causal relationship

between a dependent variable and one or more independent variables.

The former variable is to be explained in terms of the latter

A general regression (linear or non-linear) model is

Y = f (X

1

, ..., X

p

) + ,

where Y is the dependent variable, X

1

, ..., X

p

are the independent

variables, and is the error random variable

the error random variable is included to take into account

independent variables not included in the model on purpose, or simply

inadvertently

a non deterministic relationship, f , between X

1

, ..., X

p

and Y

errors in the measurement of the variables

errors in the specication of f

(University of Brescia) 24 / 42

Linear regression

Introduction

Among the models used to represent phenomena, the regression

models play a major role

Regression models allow the specication of a causal relationship

between a dependent variable and one or more independent variables.

The former variable is to be explained in terms of the latter

A general regression (linear or non-linear) model is

Y = f (X

1

, ..., X

p

) + ,

where Y is the dependent variable, X

1

, ..., X

p

are the independent

variables, and is the error random variable

the error random variable is included to take into account

independent variables not included in the model on purpose, or simply

inadvertently

a non deterministic relationship, f , between X

1

, ..., X

p

and Y

errors in the measurement of the variables

errors in the specication of f

(University of Brescia) 24 / 42

Linear regression

Introduction

Among the models used to represent phenomena, the regression

models play a major role

Regression models allow the specication of a causal relationship

between a dependent variable and one or more independent variables.

The former variable is to be explained in terms of the latter

A general regression (linear or non-linear) model is

Y = f (X

1

, ..., X

p

) + ,

where Y is the dependent variable, X

1

, ..., X

p

are the independent

variables, and is the error random variable

the error random variable is included to take into account

independent variables not included in the model on purpose, or simply

inadvertently

a non deterministic relationship, f , between X

1

, ..., X

p

and Y

errors in the measurement of the variables

errors in the specication of f

(University of Brescia) 24 / 42

Linear regression

Introduction

Among the models used to represent phenomena, the regression

models play a major role

Regression models allow the specication of a causal relationship

between a dependent variable and one or more independent variables.

The former variable is to be explained in terms of the latter

A general regression (linear or non-linear) model is

Y = f (X

1

, ..., X

p

) + ,

where Y is the dependent variable, X

1

, ..., X

p

are the independent

variables, and is the error random variable

the error random variable is included to take into account

independent variables not included in the model on purpose, or simply

inadvertently

a non deterministic relationship, f , between X

1

, ..., X

p

and Y

errors in the measurement of the variables

errors in the specication of f

(University of Brescia) 24 / 42

Linear regression

Introduction

Among the models used to represent phenomena, the regression

models play a major role

Regression models allow the specication of a causal relationship

between a dependent variable and one or more independent variables.

The former variable is to be explained in terms of the latter

A general regression (linear or non-linear) model is

Y = f (X

1

, ..., X

p

) + ,

where Y is the dependent variable, X

1

, ..., X

p

are the independent

variables, and is the error random variable

the error random variable is included to take into account

independent variables not included in the model on purpose, or simply

inadvertently

a non deterministic relationship, f , between X

1

, ..., X

p

and Y

errors in the measurement of the variables

errors in the specication of f

(University of Brescia) 24 / 42

Linear regression

Introduction

Among the models used to represent phenomena, the regression

models play a major role

Regression models allow the specication of a causal relationship

between a dependent variable and one or more independent variables.

The former variable is to be explained in terms of the latter

A general regression (linear or non-linear) model is

Y = f (X

1

, ..., X

p

) + ,

where Y is the dependent variable, X

1

, ..., X

p

are the independent

variables, and is the error random variable

the error random variable is included to take into account

independent variables not included in the model on purpose, or simply

inadvertently

a non deterministic relationship, f , between X

1

, ..., X

p

and Y

errors in the measurement of the variables

errors in the specication of f

(University of Brescia) 24 / 42

Linear regression

Introduction

Among the models used to represent phenomena, the regression

models play a major role

Regression models allow the specication of a causal relationship

between a dependent variable and one or more independent variables.

The former variable is to be explained in terms of the latter

A general regression (linear or non-linear) model is

Y = f (X

1

, ..., X

p

) + ,

where Y is the dependent variable, X

1

, ..., X

p

are the independent

variables, and is the error random variable

the error random variable is included to take into account

independent variables not included in the model on purpose, or simply

inadvertently

a non deterministic relationship, f , between X

1

, ..., X

p

and Y

errors in the measurement of the variables

errors in the specication of f

(University of Brescia) 24 / 42

Linear regression

Introduction

Among the models used to represent phenomena, the regression

models play a major role

Regression models allow the specication of a causal relationship

between a dependent variable and one or more independent variables.

The former variable is to be explained in terms of the latter

A general regression (linear or non-linear) model is

Y = f (X

1

, ..., X

p

) + ,

where Y is the dependent variable, X

1

, ..., X

p

are the independent

variables, and is the error random variable

the error random variable is included to take into account

independent variables not included in the model on purpose, or simply

inadvertently

a non deterministic relationship, f , between X

1

, ..., X

p

and Y

errors in the measurement of the variables

errors in the specication of f

(University of Brescia) 24 / 42

Linear regression

Introduction

f typically depends on parameters to be estimated based on a sample

of observations of Y and X

1

, ..., X

p

Y X

1

... X

p

y

1

x

1,1

... x

p,1

.

.

.

.

.

.

.

.

.

.

.

.

y

N

x

1,N

... x

p,N

Estimating the parameters estimates in f yields the empirical model

Y =

f (X

1

, ..., X

p

),

i.e. the formula for obtaining y

1

from x

1,1

, ..., x

p,1

, ..., y

N

from

x

1,N

, ..., x

p,N

Typically the parameters are estimated to make the dierences

y

1

y

1

, ..., y

N

y

N

as small as possible

(University of Brescia) 25 / 42

Linear regression

Introduction

f typically depends on parameters to be estimated based on a sample

of observations of Y and X

1

, ..., X

p

Y X

1

... X

p

y

1

x

1,1

... x

p,1

.

.

.

.

.

.

.

.

.

.

.

.

y

N

x

1,N

... x

p,N

Estimating the parameters estimates in f yields the empirical model

Y =

f (X

1

, ..., X

p

),

i.e. the formula for obtaining y

1

from x

1,1

, ..., x

p,1

, ..., y

N

from

x

1,N

, ..., x

p,N

Typically the parameters are estimated to make the dierences

y

1

y

1

, ..., y

N

y

N

as small as possible

(University of Brescia) 25 / 42

Linear regression

Introduction

f typically depends on parameters to be estimated based on a sample

of observations of Y and X

1

, ..., X

p

Y X

1

... X

p

y

1

x

1,1

... x

p,1

.

.

.

.

.

.

.

.

.

.

.

.

y

N

x

1,N

... x

p,N

Estimating the parameters estimates in f yields the empirical model

Y =

f (X

1

, ..., X

p

),

i.e. the formula for obtaining y

1

from x

1,1

, ..., x

p,1

, ..., y

N

from

x

1,N

, ..., x

p,N

Typically the parameters are estimated to make the dierences

y

1

y

1

, ..., y

N

y

N

as small as possible

(University of Brescia) 25 / 42

Linear regression

The linear regression model

The linear regression model is specied by the formula

Y =

0

+

p

k=1

k

X

k

+

Each parameter

k

tells how the dependent variable Y modies as X

k

modies by 1 unit, letting all other independent variables xed

Parameters

0

, ...,

p

are typically estimated with the least squares

method to yield the empirical model

Y =

0

+

p

k=1

k

X

k

(University of Brescia) 26 / 42

Linear regression

The linear regression model

The linear regression model is specied by the formula

Y =

0

+

p

k=1

k

X

k

+

Each parameter

k

tells how the dependent variable Y modies as X

k

modies by 1 unit, letting all other independent variables xed

Parameters

0

, ...,

p

are typically estimated with the least squares

method to yield the empirical model

Y =

0

+

p

k=1

k

X

k

(University of Brescia) 26 / 42

Linear regression

The linear regression model

The linear regression model is specied by the formula

Y =

0

+

p

k=1

k

X

k

+

Each parameter

k

tells how the dependent variable Y modies as X

k

modies by 1 unit, letting all other independent variables xed

Parameters

0

, ...,

p

are typically estimated with the least squares

method to yield the empirical model

Y =

0

+

p

k=1

k

X

k

(University of Brescia) 26 / 42

Linear regression

The linear regression model

Consider now the i th linear regression model

Y

i

=

0

+

p

k=1

k

X

k,i

+

i

, i = 1, ..., N,

i.e. the model referred to the i th observation of the variables,

independently of the values y

i

, x

1,i

, ..., x

p,i

, e

i

that will be observed.

Classical assumptions about the linear regression model are

E(

i

) = 0

Var (

i

) =

2

Cov(

i

,

j

), j = 1, ..., N, i = j

X

1,i

, ..., X

p,i

are not random, i.e. they are xed at the observed values

x

1,i

, ..., x

p,i

(University of Brescia) 27 / 42

Linear regression

The linear regression model

Consider now the i th linear regression model

Y

i

=

0

+

p

k=1

k

X

k,i

+

i

, i = 1, ..., N,

i.e. the model referred to the i th observation of the variables,

independently of the values y

i

, x

1,i

, ..., x

p,i

, e

i

that will be observed.

Classical assumptions about the linear regression model are

E(

i

) = 0

Var (

i

) =

2

Cov(

i

,

j

), j = 1, ..., N, i = j

X

1,i

, ..., X

p,i

are not random, i.e. they are xed at the observed values

x

1,i

, ..., x

p,i

(University of Brescia) 27 / 42

Linear regression

The linear regression model

Consider now the i th linear regression model

Y

i

=

0

+

p

k=1

k

X

k,i

+

i

, i = 1, ..., N,

i.e. the model referred to the i th observation of the variables,

independently of the values y

i

, x

1,i

, ..., x

p,i

, e

i

that will be observed.

Classical assumptions about the linear regression model are

E(

i

) = 0

Var (

i

) =

2

Cov(

i

,

j

), j = 1, ..., N, i = j

X

1,i

, ..., X

p,i

are not random, i.e. they are xed at the observed values

x

1,i

, ..., x

p,i

(University of Brescia) 27 / 42

Linear regression

The linear regression model

Consider now the i th linear regression model

Y

i

=

0

+

p

k=1

X

k,i

+

i

, i = 1, ..., N,

i.e. the model referred to the i th observation of the variables,

independently of the values y

i

, x

1,i

, ..., x

p,i

, e

i

that will be observed.

Classical assumptions about the linear regression model are

E(

i

) = 0

Var (

i

) =

2

Cov(

i

,

j

), j = 1, ..., N, i = j

X

1,i

, ..., X

p,i

are not random, i.e. they are xed at the observed values

x

1,i

, ..., x

p,i

(University of Brescia) 27 / 42

Linear regression

The linear regression model

Consider now the i th linear regression model

Y

i

=

0

+

p

k=1

k

X

k,i

+

i

, i = 1, ..., N,

i.e. the model referred to the i th observation of the variables,

independently of the values y

i

, x

1,i

, ..., x

p,i

, e

i

that will be observed.

Classical assumptions about the linear regression model are

E(

i

) = 0

Var (

i

) =

2

Cov(

i

,

j

), j = 1, ..., N, i = j

X

1,i

, ..., X

p,i

are not random, i.e. they are xed at the observed values

x

1,i

, ..., x

p,i

(University of Brescia) 27 / 42

Linear regression

The linear regression model

To assess the linear regression model t, many indicators have been

developed. We see the R square indicator, R

2

The more the model will adapt to data the lower the error variability

will be w.r.t. the total variability

The formula is

R

2

= 1

RSS

TSS

,

where RSS is the Residual Sum of Squares and TSS is the Total Sum

of Squares

(University of Brescia) 28 / 42

Linear regression

The linear regression model

To assess the linear regression model t, many indicators have been

developed. We see the R square indicator, R

2

The more the model will adapt to data the lower the error variability

will be w.r.t. the total variability

The formula is

R

2

= 1

RSS

TSS

,

where RSS is the Residual Sum of Squares and TSS is the Total Sum

of Squares

(University of Brescia) 28 / 42

Linear regression

The linear regression model

To assess the linear regression model t, many indicators have been

developed. We see the R square indicator, R

2

The more the model will adapt to data the lower the error variability

will be w.r.t. the total variability

The formula is

R

2

= 1

RSS

TSS

,

where RSS is the Residual Sum of Squares and TSS is the Total Sum

of Squares

(University of Brescia) 28 / 42

Linear regression

The linear regression model

Notice that R

2

[0, 1] and the better the t is the closer to 1 R

2

is

Notice also that R

2

increases as p, the number of independent

variables, increases. Thus, an adjusted R square indicator has been

advanced

R

2

adj

= 1

RSS

Np1

TSS

N1

.

The numbers N p 1 and N 1 are also called Residual Degrees

of Freedom and Total Degrees of Freedom, respectively

(University of Brescia) 29 / 42

Linear regression

The linear regression model

Notice that R

2

[0, 1] and the better the t is the closer to 1 R

2

is

Notice also that R

2

increases as p, the number of independent

variables, increases. Thus, an adjusted R square indicator has been

advanced

R

2

adj

= 1

RSS

Np1

TSS

N1

.

The numbers N p 1 and N 1 are also called Residual Degrees

of Freedom and Total Degrees of Freedom, respectively

(University of Brescia) 29 / 42

Linear regression

The linear regression model at work: Excel Analysis ToolPak regression routine

Consider the data of the "Regression" sheet

In Excel, choose Tools -> Data Analysis -> Regression:

input the ranges of the Y and Xs variables observations. In our case,

the Y variable is the return of stock A and the X variable is the return

of Index SPP

specify the top-left cell where you would like the output to appear. In

our case, it is cell F7

check the Residuals option

Notice the values of cells R Square, Adjusted R Square, the column

SS including RSS and TSS, and the column Coecients including the

estimates of parameters

0

, intercept, and

1

, X Variable 1

The cell Standard Error is the estimate of the standard deviation of

the model residuals; its formula is

2

=

r

RSS

N 2

=

s

var (Residuals) N 1

N 2

(University of Brescia) 30 / 42

Linear regression

The linear regression model at work: Excel Analysis ToolPak regression routine

Consider the data of the "Regression" sheet

In Excel, choose Tools -> Data Analysis -> Regression:

input the ranges of the Y and Xs variables observations. In our case,

the Y variable is the return of stock A and the X variable is the return

of Index SPP

specify the top-left cell where you would like the output to appear. In

our case, it is cell F7

check the Residuals option

Notice the values of cells R Square, Adjusted R Square, the column

SS including RSS and TSS, and the column Coecients including the

estimates of parameters

0

, intercept, and

1

, X Variable 1

The cell Standard Error is the estimate of the standard deviation of

the model residuals; its formula is

2

=

r

RSS

N 2

=

s

var (Residuals) N 1

N 2

(University of Brescia) 30 / 42

Linear regression

The linear regression model at work: Excel Analysis ToolPak regression routine

Consider the data of the "Regression" sheet

In Excel, choose Tools -> Data Analysis -> Regression:

input the ranges of the Y and Xs variables observations. In our case,

the Y variable is the return of stock A and the X variable is the return

of Index SPP

specify the top-left cell where you would like the output to appear. In

our case, it is cell F7

check the Residuals option

Notice the values of cells R Square, Adjusted R Square, the column

SS including RSS and TSS, and the column Coecients including the

estimates of parameters

0

, intercept, and

1

, X Variable 1

The cell Standard Error is the estimate of the standard deviation of

the model residuals; its formula is

2

=

r

RSS

N 2

=

s

var (Residuals) N 1

N 2

(University of Brescia) 30 / 42

Linear regression

The linear regression model at work: Excel Analysis ToolPak regression routine

Consider the data of the "Regression" sheet

In Excel, choose Tools -> Data Analysis -> Regression:

input the ranges of the Y and Xs variables observations. In our case,

the Y variable is the return of stock A and the X variable is the return

of Index SPP

specify the top-left cell where you would like the output to appear. In

our case, it is cell F7

check the Residuals option

Notice the values of cells R Square, Adjusted R Square, the column

SS including RSS and TSS, and the column Coecients including the

estimates of parameters

0

, intercept, and

1

, X Variable 1

The cell Standard Error is the estimate of the standard deviation of

the model residuals; its formula is

2

=

r

RSS

N 2

=

s

var (Residuals) N 1

N 2

(University of Brescia) 30 / 42

Linear regression

The linear regression model at work: Excel Analysis ToolPak regression routine

Consider the data of the "Regression" sheet

In Excel, choose Tools -> Data Analysis -> Regression:

input the ranges of the Y and Xs variables observations. In our case,

the Y variable is the return of stock A and the X variable is the return

of Index SPP

specify the top-left cell where you would like the output to appear. In

our case, it is cell F7

check the Residuals option

Notice the values of cells R Square, Adjusted R Square, the column

SS including RSS and TSS, and the column Coecients including the

estimates of parameters

0

, intercept, and

1

, X Variable 1

The cell Standard Error is the estimate of the standard deviation of

the model residuals; its formula is

2

=

r

RSS

N 2

=

s

var (Residuals) N 1

N 2

(University of Brescia) 30 / 42

Linear regression

The linear regression model at work: Excel Analysis ToolPak regression routine

Consider the data of the "Regression" sheet

In Excel, choose Tools -> Data Analysis -> Regression:

input the ranges of the Y and Xs variables observations. In our case,

the Y variable is the return of stock A and the X variable is the return

of Index SPP

specify the top-left cell where you would like the output to appear. In

our case, it is cell F7

check the Residuals option

Notice the values of cells R Square, Adjusted R Square, the column

SS including RSS and TSS, and the column Coecients including the

estimates of parameters

0

, intercept, and

1

, X Variable 1

The cell Standard Error is the estimate of the standard deviation of

the model residuals; its formula is

2

=

r

RSS

N 2

=

s

var (Residuals) N 1

N 2

(University of Brescia) 30 / 42

Linear regression

The linear regression model at work: Excel Analysis ToolPak regression routine

Consider the data of the "Regression" sheet

In Excel, choose Tools -> Data Analysis -> Regression:

input the ranges of the Y and Xs variables observations. In our case,

the Y variable is the return of stock A and the X variable is the return

of Index SPP

specify the top-left cell where you would like the output to appear. In

our case, it is cell F7

check the Residuals option

Notice the values of cells R Square, Adjusted R Square, the column

SS including RSS and TSS, and the column Coecients including the

estimates of parameters

0

, intercept, and

1

, X Variable 1

The cell Standard Error is the estimate of the standard deviation of

the model residuals; its formula is

2

=

r

RSS

N 2

=

s

var (Residuals) N 1

N 2

(University of Brescia) 30 / 42

Probability

Introduction

Decision-making means choosing between two or more alternatives.

Good decision-making is based on evaluating which alternative has

the best chance of succeeding. When managers refer to the chance of

something occurring, they are using probability in the decision-making

process

Probability is the chance (expressed with a real number p [0, 1])

that something (an event) will happen

The ve Platonic solids and two

trapezohedrons.

(University of Brescia) 31 / 42

Probability

Introduction

Decision-making means choosing between two or more alternatives.

Good decision-making is based on evaluating which alternative has

the best chance of succeeding. When managers refer to the chance of

something occurring, they are using probability in the decision-making

process

Probability is the chance (expressed with a real number p [0, 1])

that something (an event) will happen

The ve Platonic solids and two

trapezohedrons.

(University of Brescia) 31 / 42

Probability

Introduction

Old, unsatisfactory classical probability dened the probability of an

event, given that each of the outcomes of an experiment are equally

likely, as

P(event) =

number of outcomes realizing the event

total number of outcomes

Frequentist denition improves on classical weakness. It proposes to

dene probability of an event as a limit, in particular as the limit of

the ratio between the number of time when the event happens over

the total number of observations:

lim

n

n

A

n

= P (A)

(University of Brescia) 32 / 42

Probability

Introduction

Old, unsatisfactory classical probability dened the probability of an

event, given that each of the outcomes of an experiment are equally

likely, as

P(event) =

number of outcomes realizing the event

total number of outcomes

Frequentist denition improves on classical weakness. It proposes to

dene probability of an event as a limit, in particular as the limit of

the ratio between the number of time when the event happens over

the total number of observations:

lim

n

n

A

n

= P (A)

(University of Brescia) 32 / 42

Probability

Probability distributions

A probability distribution is a way of recording the way probability

distributes over each event linked to an experiment. We will briey

discuss of four probability distributions. They are real probability

distributions because they are linked to events represented by sets of

real numbers

the Binomial distribution, which is a discrete distribution

the Poisson distribution, which is a discrete distribution often used to

count the number of occurrences of some event in a given period of

time

the exponential distribution, which is a continuous distribution used to

measure the length of time needed to perform some activity

the important continuous distribution known as the normal distribution

The cumulative probability distribution of real -dened events is the

probability of events dened by interval (, x], with x R. As

x + we see that P((, x]) 1

(University of Brescia) 33 / 42

Probability

Probability distributions

A probability distribution is a way of recording the way probability

distributes over each event linked to an experiment. We will briey

discuss of four probability distributions. They are real probability

distributions because they are linked to events represented by sets of

real numbers

the Binomial distribution, which is a discrete distribution

the Poisson distribution, which is a discrete distribution often used to

count the number of occurrences of some event in a given period of

time

the exponential distribution, which is a continuous distribution used to

measure the length of time needed to perform some activity

the important continuous distribution known as the normal distribution

The cumulative probability distribution of real -dened events is the

probability of events dened by interval (, x], with x R. As

x + we see that P((, x]) 1

(University of Brescia) 33 / 42

Probability

Probability distributions

A probability distribution is a way of recording the way probability

distributes over each event linked to an experiment. We will briey

discuss of four probability distributions. They are real probability

distributions because they are linked to events represented by sets of

real numbers

the Binomial distribution, which is a discrete distribution

the Poisson distribution, which is a discrete distribution often used to

count the number of occurrences of some event in a given period of

time

the exponential distribution, which is a continuous distribution used to

measure the length of time needed to perform some activity

the important continuous distribution known as the normal distribution

The cumulative probability distribution of real -dened events is the

probability of events dened by interval (, x], with x R. As

x + we see that P((, x]) 1

(University of Brescia) 33 / 42

Probability

Probability distributions

A probability distribution is a way of recording the way probability

distributes over each event linked to an experiment. We will briey

discuss of four probability distributions. They are real probability

distributions because they are linked to events represented by sets of

real numbers

the Binomial distribution, which is a discrete distribution

the Poisson distribution, which is a discrete distribution often used to

count the number of occurrences of some event in a given period of

time

the exponential distribution, which is a continuous distribution used to

measure the length of time needed to perform some activity

the important continuous distribution known as the normal distribution

The cumulative probability distribution of real -dened events is the

probability of events dened by interval (, x], with x R. As

x + we see that P((, x]) 1

(University of Brescia) 33 / 42

Probability

Probability distributions

A probability distribution is a way of recording the way probability

distributes over each event linked to an experiment. We will briey

discuss of four probability distributions. They are real probability

distributions because they are linked to events represented by sets of

real numbers

the Binomial distribution, which is a discrete distribution

the Poisson distribution, which is a discrete distribution often used to

count the number of occurrences of some event in a given period of

time

the exponential distribution, which is a continuous distribution used to

measure the length of time needed to perform some activity

the important continuous distribution known as the normal distribution

The cumulative probability distribution of real -dened events is the

probability of events dened by interval (, x], with x R. As

x + we see that P((, x]) 1

(University of Brescia) 33 / 42

Probability

Probability distributions

A probability distribution is a way of recording the way probability

distributes over each event linked to an experiment. We will briey

discuss of four probability distributions. They are real probability

distributions because they are linked to events represented by sets of

real numbers

the Binomial distribution, which is a discrete distribution

the Poisson distribution, which is a discrete distribution often used to

count the number of occurrences of some event in a given period of

time

the exponential distribution, which is a continuous distribution used to

measure the length of time needed to perform some activity

the important continuous distribution known as the normal distribution

The cumulative probability distribution of real -dened events is the

probability of events dened by interval (, x], with x R. As

x + we see that P((, x]) 1

(University of Brescia) 33 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

A salesman at SellEvryThing Company makes twenty calls per day to

randomly selected homes. The probability of the salesman making a

sale is 0.1, i.e.

P(1) = 0.1,

where 1 indicates the event "a phone call ends with a sale"

The client answering the call of SellEvryThing

Company.

(University of Brescia) 34 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

Given that the probability of a successful outcome is p, the binomial

distribution indicates the probability of succeeding q times over n

trials (n _ q):

P(q) =

n

q

p

q

(1 p)

nq

=

n!

q!(n q)!

p

q

(1 p)

nq

Each trial is independent of the others

Each trial is also called Bernoulli trial

Each Bernoulli trial has two outcames: success, or fail

(University of Brescia) 35 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

Given that the probability of a successful outcome is p, the binomial

distribution indicates the probability of succeeding q times over n

trials (n _ q):

P(q) =

n

q

p

q

(1 p)

nq

=

n!

q!(n q)!

p

q

(1 p)

nq

Each trial is independent of the others

Each trial is also called Bernoulli trial

Each Bernoulli trial has two outcames: success, or fail

(University of Brescia) 35 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

Given that the probability of a successful outcome is p, the binomial

distribution indicates the probability of succeeding q times over n

trials (n _ q):

P(q) =

n

q

p

q

(1 p)

nq

=

n!

q!(n q)!

p

q

(1 p)

nq

Each trial is independent of the others

Each trial is also called Bernoulli trial

Each Bernoulli trial has two outcames: success, or fail

(University of Brescia) 35 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

Given that the probability of a successful outcome is p, the binomial

distribution indicates the probability of succeeding q times over n

trials (n _ q):

P(q) =

n

q

p

q

(1 p)

nq

=

n!

q!(n q)!

p

q

(1 p)

nq

Each trial is independent of the others

Each trial is also called Bernoulli trial

Each Bernoulli trial has two outcames: success, or fail

(University of Brescia) 35 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

Use Excel binomial distribution function BINOMDIST to nd the

probability of

no sales, i.e. P(0)

four sales, i.e. P(4)

more than four sales, i.e.

20

i =5

P(i ) = P(5) +P(6) + ... +P(20)

= 1 P(0) P(1)

P(2) P(3) P(4) = 1

4

i =0

P(i ) = 1 P((, 4])

four or more sales, i.e.

20

i =4

P(i ) = 1

3

i =0

P(i ) = 1 P((, 3])

(University of Brescia) 36 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

Use Excel binomial distribution function BINOMDIST to nd the

probability of

no sales, i.e. P(0)

four sales, i.e. P(4)

more than four sales, i.e.

20

i =5

P(i ) = P(5) +P(6) + ... +P(20)

= 1 P(0) P(1)

P(2) P(3) P(4) = 1

4

i =0

P(i ) = 1 P((, 4])

four or more sales, i.e.

20

i =4

P(i ) = 1

3

i =0

P(i ) = 1 P((, 3])

(University of Brescia) 36 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

Use Excel binomial distribution function BINOMDIST to nd the

probability of

no sales, i.e. P(0)

four sales, i.e. P(4)

more than four sales, i.e.

20

i =5

P(i ) = P(5) +P(6) + ... +P(20)

= 1 P(0) P(1)

P(2) P(3) P(4) = 1

4

i =0

P(i ) = 1 P((, 4])

four or more sales, i.e.

20

i =4

P(i ) = 1

3

i =0

P(i ) = 1 P((, 3])

(University of Brescia) 36 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

Use Excel binomial distribution function BINOMDIST to nd the

probability of

no sales, i.e. P(0)

four sales, i.e. P(4)

more than four sales, i.e.

20

i =5

P(i ) = P(5) +P(6) + ... +P(20)

= 1 P(0) P(1)

P(2) P(3) P(4) = 1

4

i =0

P(i ) = 1 P((, 4])

four or more sales, i.e.

20

i =4

P(i ) = 1

3

P(i ) = 1 P((, 3])

(University of Brescia) 36 / 42

Probability

SellEvryThing Company: BINOMDIST, Excel binomial distribution function

Use Excel binomial distribution function BINOMDIST to nd the

probability of

no sales, i.e. P(0)

four sales, i.e. P(4)

more than four sales, i.e.

20

i =5

P(i ) = P(5) +P(6) + ... +P(20)

= 1 P(0) P(1)

P(2) P(3) P(4) = 1

4

i =0

P(i ) = 1 P((, 4])

four or more sales, i.e.

20

i =4

P(i ) = 1

3

i =0

P(i ) = 1 P((, 3])

(University of Brescia) 36 / 42

Inference

Introduction and sampling distribution

Inferential statistics, usually abbreviated to inference, is a process by

which conclusions about the features of a population are

reached on the basis of examining only a part of it. Think to an

opinion poll that is used to predict the voting pattern of a country's

population during an election

A quality-control manager will take a random sample of products and

if it is found that the number of defective items is too high the entire

batch will be rejected. Label a defective item of the sample with 1,

while put a 0 to each complying item. The sample mean of 1s and 0s

is the proportion of defective items

(University of Brescia) 37 / 42

Inference

Introduction and sampling distribution

Inferential statistics, usually abbreviated to inference, is a process by

which conclusions about the features of a population are

reached on the basis of examining only a part of it. Think to an

opinion poll that is used to predict the voting pattern of a country's

population during an election

A quality-control manager will take a random sample of products and

if it is found that the number of defective items is too high the entire

batch will be rejected. Label a defective item of the sample with 1,

while put a 0 to each complying item. The sample mean of 1s and 0s

is the proportion of defective items

(University of Brescia) 37 / 42

Inference

Introduction and sampling distribution

When the mean is calculated from a sample, the observed value,

X,

depends on which sample was extracted (of the many possible

samples that could be chosen).

Two samples from the same population are likely to have dierent

sample means, therefore possibly leading to dierent conclusions

Managers need to understand how sample means are distributed

throughout the population, i.e. the sampling mean distribution.

(University of Brescia) 38 / 42

Inference

Introduction and sampling distribution

When the mean is calculated from a sample, the observed value,

X,

depends on which sample was extracted (of the many possible

samples that could be chosen).

Two samples from the same population are likely to have dierent

sample means, therefore possibly leading to dierent conclusions

Managers need to understand how sample means are distributed

throughout the population, i.e. the sampling mean distribution.

(University of Brescia) 38 / 42

Inference

Introduction and sampling distribution

When the mean is calculated from a sample, the observed value,

X,

depends on which sample was extracted (of the many possible

samples that could be chosen).

Two samples from the same population are likely to have dierent

sample means, therefore possibly leading to dierent conclusions

Managers need to understand how sample means are distributed

throughout the population, i.e. the sampling mean distribution.

(University of Brescia) 38 / 42

Inference

AstroReturns Company: sampling mean distribution

The investment manager of AstroReturns Company has been asked

by a client to formulate a hypothesis about the average return on his

portfolio investment of six stocks at the end of the next year

How stock markets are perceived nowadays more than ever.

(University of Brescia) 39 / 42

Inference

AstroReturns Company: sampling mean distribution

The manager has the following data about the six stocks returns (in

%) realized in the last year

Stock A B C D E F

Return (%) 8 11 3 18 3 5

Let's illustrate the concept of sampling error. The investment

manager is shrewd and he will base his report on the best mean

return of a sample of three stocks from the six available, i.e. stocks

D, B, and A. The hypothesis he formulates to the client is:

next year's return on your portfolio investment of stocks A, B, C, D, E,

and F will be

18 + 11 + 8

3

= 12, 33%

(University of Brescia) 40 / 42

Inference

AstroReturns Company: sampling mean distribution

The manager has the following data about the six stocks returns (in

%) realized in the last year

Stock A B C D E F

Return (%) 8 11 3 18 3 5

Let's illustrate the concept of sampling error. The investment

manager is shrewd and he will base his report on the best mean

return of a sample of three stocks from the six available, i.e. stocks

D, B, and A. The hypothesis he formulates to the client is:

next year's return on your portfolio investment of stocks A, B, C, D, E,

and F will be

18 + 11 + 8

3

= 12, 33%

(University of Brescia) 40 / 42

Inference

AstroReturns Company: sampling mean distribution

However the client is not dumb, because he knows that this is only

one of the possible 20 outcomes. See the following table

Stock sample Mean return (%) Stock sample Mean return (%)

CEF 1.67 ABE 7.33

ACE 2.67 ACD 7.67

ACF 3.33 ABF 8.00

BCE 3.67 BCD 8.67

BCF 4.33 DEF 8.67

ABC 5.33 ADE 9.67

AEF 5.33 ADF 10.33

CDE 6.00 BDE 10.67

BEF 6.33 BDF 11.33

CDF 6.67 ABD 12.33

where the 20 outcomes are calculated from the combinations (without

repetition) of 6 objects of class 3

(University of Brescia) 41 / 42

Inference

AstroReturns Company: sampling mean distribution

To avoid "loosing his fees" for having been too optimistic, the

investment manager should organize the sample means to have a

clearer picture, i.e. he needs to draw the sampling mean distribution

Exercise: use Excel FRQUENCY function and ChartWizard to

represent the frequency distribution of the sample mean by grouping

the data into 5 intervals. Notice that the mean of the sample

mean distribution is equal to the mean of the population

Exercise: repeat the previous exercise on a table of means of samples

of four stocks

Exercise: repeat the previous exercise on a table of means of samples

of ve stocks

Notice that the chart of the sampling mean distribution tends

to become more bell-shaped

(University of Brescia) 42 / 42

Inference

AstroReturns Company: sampling mean distribution

To avoid "loosing his fees" for having been too optimistic, the

investment manager should organize the sample means to have a

clearer picture, i.e. he needs to draw the sampling mean distribution

Exercise: use Excel FRQUENCY function and ChartWizard to

represent the frequency distribution of the sample mean by grouping

the data into 5 intervals. Notice that the mean of the sample

mean distribution is equal to the mean of the population

Exercise: repeat the previous exercise on a table of means of samples

of four stocks

Exercise: repeat the previous exercise on a table of means of samples

of ve stocks

Notice that the chart of the sampling mean distribution tends

to become more bell-shaped

(University of Brescia) 42 / 42

Inference

AstroReturns Company: sampling mean distribution

To avoid "loosing his fees" for having been too optimistic, the

investment manager should organize the sample means to have a

clearer picture, i.e. he needs to draw the sampling mean distribution

Exercise: use Excel FRQUENCY function and ChartWizard to

represent the frequency distribution of the sample mean by grouping

the data into 5 intervals. Notice that the mean of the sample

mean distribution is equal to the mean of the population

Exercise: repeat the previous exercise on a table of means of samples

of four stocks

Exercise: repeat the previous exercise on a table of means of samples

of ve stocks

Notice that the chart of the sampling mean distribution tends

to become more bell-shaped

(University of Brescia) 42 / 42

Inference

AstroReturns Company: sampling mean distribution

To avoid "loosing his fees" for having been too optimistic, the

investment manager should organize the sample means to have a

clearer picture, i.e. he needs to draw the sampling mean distribution

Exercise: use Excel FRQUENCY function and ChartWizard to

represent the frequency distribution of the sample mean by grouping

the data into 5 intervals. Notice that the mean of the sample

mean distribution is equal to the mean of the population

Exercise: repeat the previous exercise on a table of means of samples

of four stocks

Exercise: repeat the previous exercise on a table of means of samples

of ve stocks

Notice that the chart of the sampling mean distribution tends

to become more bell-shaped

(University of Brescia) 42 / 42

Inference

AstroReturns Company: sampling mean distribution

To avoid "loosing his fees" for having been too optimistic, the

investment manager should organize the sample means to have a

clearer picture, i.e. he needs to draw the sampling mean distribution

Exercise: use Excel FRQUENCY function and ChartWizard to

represent the frequency distribution of the sample mean by grouping

the data into 5 intervals. Notice that the mean of the sample

mean distribution is equal to the mean of the population

Exercise: repeat the previous exercise on a table of means of samples

of four stocks

Exercise: repeat the previous exercise on a table of means of samples

of ve stocks

Notice that the chart of the sampling mean distribution tends

to become more bell-shaped

(University of Brescia) 42 / 42

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