THE NORMAL

PROBABILITY

DISTRIBUTION

Normal Probability Distribution

Financial Statistics Notes

4. THE NORMAL PROBABILITY DISTRIBUTION

OBJECTIVES
On completion of this unit students and using Microsoft Excel where appropriate, students should be
able to:
1. Recognise a data distribution whose general features could be explained by a normal density
curve.
2. Locate the mean and estimate the standard deviation of a normal distribution given its
density curve.
3. Understand and apply the 68-95-99.7% rule for determining the percentage of values that lie
within one, two and three standard deviations of the mean of a normal distribution.

Z=
4. Standardise values in a normal distribution by applying the formula:

5. Utilise Microsoft Excel to determine any given area under any normal curve.
6. Solve problems that utilise the normal probability distribution.

4.1.

Introduction to the Normal Distribution

4.1.1.

The Probability Density Curve

The general shape of a distribution is often described by a smooth line, which takes no account of the
irregularities in the histogram of the sample data. The mathematical equation for the smooth curve
which describes the distribution of a variable, can often be found. If the area under the smooth curve is
equal to 1, then in this case the curve is called a probability density curve.

4.1.2.

The Normal Density Curve

When a histogram of a data distribution is replaced by a density curve it is found that many of these
density curves have the same characteristic bell shape. Since this bell shaped density curve occurs so
often in practice, it has been given the special name of the normal density curve, or normal curve for
short. This distribution was originally proposed by Karl Gauss, an 18th century mathematicianastronomer, who observed that discrepancies among repeated measurements of the same physical
quantity displayed a regular bell-shaped pattern which could be approximated by a special distribution
which we now know as the normal distribution.
When the general shape of a data distribution can be described by a normal density curve, the data is
said to be normally distributed and the variable being measured is a normal random variable. Some
examples of data distributions that are approximately normally distributed include height, weight, IQ
scores, scientific measurements and many test scores. Since many natural phenomena have been found
to follow at least approximately a normal distribution, the normal distribution has an important place in
statistics. It is also an important distribution in the theory of statistics.

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Normal Probability Distribution

=0
=1

Figure 4.1: The standard normal probability density curve.

4.1.3.

Properties of the Normal Distribution

Each normal distribution is unique and is distinguished by its mean and standard deviation .

The normal curve is symmetric and bell shaped, with the centre at the mean of the distribution it
represents and the width determined by the standard deviation. Since the curve is symmetric,
the mean equals the median.

The total area under the curve is equal to 1.

The normal distribution is such that the percentage of values that lie within a given number of
standard deviations from the mean is always the same, regardless of the mean and standard
deviation of the particular normal distribution. In particular, it can be shown mathematically
that:
Approximately 68% of the values in a normal distribution lie within 1 standard
deviation of the mean, ie within
Approximately 95% of the values in a normal distribution lie within 2 standard
deviations of the mean ie 2
Approximately 99.7%(almost all) of the values in a normal distribution lie within 3
standard deviations of the mean 3

Figure 4.2 Percentages of the normal probability distribution.

Financial Statistics Notes

Example 4-1
The heights of women are approximately normally distributed with a mean =160cm and a standard
deviation =8cm as shown below.

Figure 4.3 Distribution of heights of women in cm.

(a)

What percentage of women would you expect to have heights

i.

between 144 and 176 cm?

ii. between 152 and 168 cm?

iii. greater than 168 cm?
iv. less than 136 cm?
(b)

How tall would you have to be to be in the tallest 2.5% of women?

Solution
(a)
i.

95%, as 144 is 2 standard deviations below and 176 is 2 standard deviations above the mean

ii. (ii) 68%, as 152 is 1 standard deviation below and 168 is 1 standard deviation above the
mean
iii. 16%, as one tail in (ii) has (100 - 68)/2% of the area
iv. 0.15%, as one tail outside 3 standard deviations has (100 - 99.7)/2% of the area
(b)

4.1.4.

176 cm or taller as this gives the top (100 - 95)/2% of area for 2 standard deviations above
the mean.

Standardisation

Normally distributed data can be converted to a new set of units, showing the number of standard
deviations that each data value lies from the mean. These new values are called standardised values or
Z-values. Meaningful comparisons can then be made, not only between data values within a particular
distribution but also for making comparisons across distributions which have different means and

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Normal Probability Distribution

standard deviations. For any data value X, taken from a normal distribution with mean and standard
deviation , the standardised or Z-value is given by

Z=

The mean of a standard normal distribution is zero and the standard deviation has the value 1. Z
measures the distance, in number of standard deviations, of a value from the mean.
See Figure 4.1.
Data above the mean have positive Z-values.
Data below the mean have negative Z-values.

Example 4-2
The heights of women are approximately normally distributed with a mean =160cm and a standard
deviation = 8 cm. (See Figure 4.3 on page 5). What is the standardised or Z-value for a woman who
is:
(a)
160cm tall ?
(b)

150cm tall ?

(c)

172cm tall ?

Solution:

4.1.5.

(a)

Z= 0 as 160 is the mean of the distribution.

(b)

Z= (150-160)/8 = -1.25

(c)

Z= (172-160)/8 = 1.5

The Standard Normal Curve

Since each unique normal probability distribution has the same general properties regardless of its mean
and standard deviation, we can standardise all normal curves so that they reduce to the same normal
curve with a mean =0 and standard deviation =1. This unique normal curve is called the standard
normal density curve. Specially prepared standard normal tables are available (see the end of the book)
so that any given area under the standard normal curve can be computed.
The area under the normal curve over a specific interval represents the probability that the normal
random variable lies within that interval.

Financial Statistics Notes

Example 4-3
What is Pr(Z 2)?
Solution
0.975

Figure 4.4

NOTES:
1.
2.

Always draw a diagram when solving normal distribution problems. This will
assist you in identifying if you have a an answer which is clearly incorrect.
The normal distribution is symmetrical and therefore having calculated Pr (Z2)
0.975, then we also could also say that Pr (Z-2) 0.975 just by considering
the equivalent shaded upper area as shown in Figure 4.5.
0.975

Figure 4.5

4.1.6.

Calculating Standard Normal Probabilities using Microsoft Excel

The basic method for calculating standard normal probabilities is to use the normsdist function in Excel.
Typing =normsdist(z) calculates the area to the left of any specified z value in the standard normal
distribution, and hence this information can be then used to calculate any required probability relating to
the standard normal distribution. The general principle for this using the normsdist command for
calculating different types of probabilities is shown on the following page for the three different cases
that arise.

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Normal Probability Distribution

Case 1

Pr(Za)

=NORMSDIST(a)

Area given by
NORMSDIST =

Pr(Za)

Case 2

Pr(Za)

=1- NORMSDIST(a)
Area given
NORMSDIST

by

Area required
for Pr(Za)

Case 3

Pr(aZb) =NORMSDIST(b) - NORMSIDST(a)

Area
given
NORMSDIST
Pr(Za)

by
for

Area
given
NORMSDIST
Pr(Zb)

by
for

Area required
Pr(aZb)

for

Financial Statistics Notes

Using Microsoft Excel to calculate standard normal

probabilities of the form Pr(Za) or Pr(Z<a)
Step 1:
diagram

draw

Step 2:
Using
the
Normsdist
command
in
Excel

We will illustrate how to calculate such probabilities using the example

from Example 4-3, where we wanted to calculate.
This is an example of case 1 (see the table on p.190), where we want to
calculate the area to the left of a particular value in the standard normal
distribution. Click an empty cell in an Excel spreadsheet (in this and
subsequent normal distribution examples in this text, cell A1 will be used).
Type =normsdist(2) in this case, and press ENTER.

Correct to three decimal places, Pr(Z2) = 0.977

You will notice that this answer is slightly different to the one given when
we applied the 95% rule to calculate this probability on p.189 This is
because Excel gives a more exact answer than calculation with the rule.

Note: because the normal distribution is a continuous probability distribution, Pr(Z=a) = 0 for any
individual value in the distribution. For example, Pr(Z=2) = 0. It follows that in the standard normal
distribution, Pr(Za) always gives the same value as Pr(Z<a). So for instance, Pr(Z<2) would also be
calculated as =normsdist(2), giving the same answer of 0.977 as in the above example.

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Normal Probability Distribution

Using statistical tables to calculate standard normal probabilities

An alternative to using Microsoft Excel to calculate probabilities in the standard normal curve is to use
statistical tables. In this subject, a standard normal distribution table will be provided on Blackboard.
The left column of the table shows the value of z, correct to one decimal place. The numbers at the top
of the table show the second decimal place of z. Use these two values to find the corresponding area to
the left of z, which is shown in the main body of the table.
Use the following link to Swinburne Library for Statistical tables
http://ezproxy.lib.swin.edu.au/login?url=http://onlineres.swin.edu.au/1000251.pdf

z
For example, to find Pr(Z2), we are looking for the area under the standard normal curve to the left of
z = 2.00. Therefore, we would go to the 2.0 row in the z column, and we would go to the 0.00 column,
which indicates an area of 0.9772 to the left of z = 2.00.
z

0.00
2.0

0.9772

Hence Pr(Z2) = 0.9772.

10

Financial Statistics Notes

Example 4-4
What is Pr(Z -1.37)?
Solution

Using Microsoft Excel to calculate standard

normal probabilities of the form Pr(Za) or
Pr(Z>a)
Step 1:
Draw diagram

This is an example of case 2 (see the table on p.190), where we want to

calculate the area to the right of a particular value in the standard normal
distribution. Therefore, since normsdist always calculates an area to the
left, which would be Pr(Z-1.37) in this case, we need to calculate
1 Pr(Z-1.37) in order to get the required Pr(Z-1.37). That is, visually
speaking, we need to subtract the area to the left of -1.37 from the total
area of the normal curve, which is 1.

Step 2:
Using
the
Normsdist
command
in
Excel

Hence, in cell A1, type = 1-normsdist(-1.37) and press ENTER.

Hence, Pr(Z-1.37) = 0.915

To solve this problem, using the standard normal distribution table, we would first find Pr(Z-1.37) by
looking at the -1.3 row of z and the 0.07 column (since 1.37 = 1.3 + 0.07), which gives
Pr(Z-1.37) = 0.0853.
z

0.07

-1.3

0.0853

To obtain Pr(Z-1.37), we then calculate Pr(Z-1.37) = 1 Pr(Z-1.37) = 1 0.0853 = 0.9147.

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Normal Probability Distribution

Example 4-5
Find Pr(z 2).
Solution
Step 1:
Draw diagram
for
Pr(Z 2).

Step 2:
Using
the
Normsdist
command
in
Excel

We would expect an answer much less than 0.50.

This is another example of case 2; calculating a probability of the form
Pr(Za). Therefore, in cell A1, type =1-normdist(2) and press ENTER.

Hence Pr(Z2) = 0.023

Using the standard normal distribution table, we would obtain Pr(Z2) = 1 Pr(Z2)
= 1 0.9772 = 0.0228
Example 4-6
Find Pr(-1.37 Z 0)
Solution

Using Microsoft Excel to calculate standard

normal probabilities of the form Pr(aZb) or
Pr(a<Z<b)
Step 1:
Draw diagram
for
Pr(-1.37 Z 0)

12

Financial Statistics Notes

Step 2: Using the

Normsdist
command in Excel

This is an example of case 3 (see the table on p.190), where we want to

calculate the area between two values in the standard normal
distribution. Therefore, since normsdist always calculates an area to
the left, in this case, we need to calculate Pr(Z0) Pr(Z-1.37)
to get the required Pr(-1.37Z0). That is, visually speaking, we need
to subtract the area to the left of -1.37 from the area to the left of 0.
Hence, in cell A1, type =normsdist(0) normsdist(-1.37) and press
ENTER.

Hence Pr(-1.37Z0) = 0.415

Similarly, using the standard normal distribution table, we would calculate
Pr(-1.37Z0) = Pr(Z0) Pr(Z-1.37) = 0.5000 0.0853 = 0.4147
Example 4-6
Find Pr(1.5 Z 3).
Solution
Step 1:
Draw diagram
for
Pr(1.5 Z 3)

Step 2: Using
the Normsdist
command
in
Excel

We would expect an answer much less than 0.50.

This is another example of case 3, where we want to calculate the area
between two values in the standard normal distribution. Therefore, we
require Pr(Z3) Pr(Z1.5) in this case.
Hence, in cell A1, type =normsdist(3) normsdist(1.5) and press
ENTER.

Hence Pr(1.5 Z 3) = 0.0655

Using the standard normal distribution table we would calculate
Pr(1.5 Z 3) = Pr(Z3) Pr(Z1.5) = 0.9987 0.9332 = 0.0655

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Normal Probability Distribution

Example 4-7
What is Pr(-1.37 Z 2)?
Solution
Step 1:
Draw diagram
for
Pr(-1.37 Z 2)

Step 2: Using the

Normsdist
command
in
Excel

This is another example of case 3, where we want to calculate the area

between two values in the standard normal distribution. Therefore, we
require Pr(Z2) Pr(Z-1.37) in this case.
Hence, in cell A1, type =normsdist(2) normsdist(-1.37) and press
ENTER.

Hence, Pr(-1.37 Z 2)= 0.892

Using the standard normal distribution table, we would calculate
Pr(-1.37 Z 2) = Pr(Z2) Pr(Z-1.37) = 0.9772 0.0853 = 0.8919

14

Financial Statistics Notes

Example 4-8
Find the z value such that the probability of obtaining a larger z value is 20% (or 0.2).
Solution:
This problem is different from the previous 6 problems, where the z value was specified and the
corresponding probabilities (or areas) were found. In this example the probability (area) has been
specified and it is necessary to find the corresponding z value. Lets call the z-value we are looking for
a. We should still commence by drawing a diagram of the information we have been given. We know
Pr (Z > a) = 0.2.
Step 1:
Draw diagram
for
Pr (Z > a) = 0.2

Step 2:
Determine area
below a

Step 3:
Normsinv
function

Now the normsinv function in Microsoft Excel can assist us in determining

the value of a, but we need to enter into the function the area below a.
We require Pr (Z < a) = ?
Since the total area under the curve is 1 then the area below a will be
1 0.2 = 0.8
That is, we need to find a satisfying Pr (Z < a) = 0.8
The normsinv function in Excel will calculate the value of a with the
required area (0.8 in this case) to the left of it. Click on cell A1 and type
=normsinv(0.8) and press ENTER.

Therefore a = 0.842
This means that Pr(z < 0.842) = 0.8 and hence Pr(z 0.842) = 0.2 as
required.

Page | 15

Normal Probability Distribution

To calculate the required value of z from the standard normal distribution table, we would look for the
required area of 0.8 in the body of the table.
z
0.84

0.01

0.02

0.03

0.7967 0.7995 0.8023

The value of z falls between z = 0.842 and z = 0.843 in this case, with it being closer to z = 0.842 (since
0.7995 is closer to 0.8000 than 0.8023). Hence z 0.842
DO EXERCISE SET 4A ON PAGE 209

16

Financial Statistics Notes

4.1.7.

Computing Normal Probabilities

We previously saw that the normsdist command calculated probabilities in the standard normal
distribution (which has = 0, = 1). Using Microsoft Excel we can calculate probabilities associated
with any normal distribution (not only the standard normal distribution) by using the normdist function.
To see how the normdist function works, consider the example of calculating the probability that that a
randomly selected value in a normal distribution with mean = 20 and standard deviation = 5 is less
than 13.

Using Microsoft Excel to calculate probabilities in

a normal distribution for a given mean and
standard deviation
Step 1:
Draw diagram

Page | 17

Normal Probability Distribution

Step 2:
Using
Normdist
command
Excel

the

To see the logic of the normdist command, click cell A1 in a spreadsheet,

then click the
button to bring up the box shown below.

in

Ensure that Statistical is chosen beside select a category, scroll down to

highlight NORMDIST as shown above and click OK. This should
produce a dialogue box like the one shown below.

As with the normsdist command, the normdist command will always

calculate the area to the left of a given value in the distribution, so we will
use the same general logic as in the table on p.190 when doing
calculations of this type. In this case we require Pr(X13) which is an
area to the left (case 1 on p.190) so the correct answer will be created
directly by entering the appropriate values into the above dialogue box.
For X enter the value in the distribution, which is 13 in this case.
For Mean enter which is 20 here.
For Standard_dev enter which is 5 here.
For Cumulative we always enter true when calculating normal
distribution probabilities (this is because probabilities in a continuous
distribution are calculated using its cumulative distribution function).

18

Financial Statistics Notes

Step 3:
probability
From the resulting output, we can see Pr(X13) = 0.081
To save time, note that the general structure of the Excel normdist function to obtain the area to the left
of a value in a normal distribution is:
normdist(value, mean, standard deviation, true)
Therefore, in the above example, we could have simply clicked cell A1 and typed
=normdist(13,20,5,true) and pressed ENTER to obtain the above result of 0.081. In future examples,
we will just type in the normdist command in this manner.

Using standard normal distribution tables

An alternative method of calculating probabilities is to use the standard normal distribution table. To
use the table, you must first convert X to Z. Recall that Z =

In the above example, = 20 and = 5. Hence Pr(X13) = Pr (

(see p.188).

X 13 20

) = Pr(Z-1.4) = 0.0808

Lets return to Example 4-2. The heights of young women are approximately normally distributed with a
mean = 160 cm and a standard deviation = 8 cm as shown below.

136 144 152 160 168 176 184

height in cm
-3

-2

-1

Number of standard deviations from mean

Suppose we are interested in the probability that a young woman is between 152cm and 168cm tall.

Page | 19

Normal Probability Distribution

Step 1:
Draw diagram
for
Pr(152 < X <168)

Step 2:
Normdist function

This is an example of case 3 (see table on p.190), where we want to

calculate the area between two values in a normal distribution.
Therefore, we require Pr(X < 168) Pr(X < 152) in this case.
Since it is not the standard normal distribution, we will also need to
specify the mean (160) and standard deviation (8) of the distribution
each time we use the normdist command, and specify true so that it is
clear it is an area under the curve that we are calculating. That is, each
time we use the normdist command it must have structure
normdist(value, mean, standard deviation, true)
Hence, in cell A1, type
=normdist(168,160,8,true) normdist(152,160,8,true) and press
ENTER.

Hence Pr(152 < X <168) = 0.683

Alternatively, we could calculate the probability using standard normal distribution tables, by first
converting X to Z, to obtain
P(152<X<168) = Pr (

152 160
168 160
<Z<
)
8
8

= P(-1< Z <1)
= P(Z<1) P(Z < -1)
= 0.8413 0.1587
= 0.6826.

20

Financial Statistics Notes

Example 4-9
Suppose that the distance a truck belonging to a large freight company travels per year is normally
distributed with a mean of 95,000 km and a standard deviation of 8,000 km. What percentage of trucks
travel between 80,000 and 100,000 km per year?
Solution
Step 1:
Draw diagram
for
Pr(80,000<X <100,000)

Step 2:
Normdist function

This is an example of case 3 (see table on p.190), where we want to

calculate the area between two values in a normal distribution.
Therefore, we require Pr(X < 100,000) Pr(X < 80,000) in this
case.
In this case, the mean = 95,0000 and the standard deviation =
8,000. Hence, in cell A1, type
=normdist(100000,95000,8000,true)
normdist(80000,95000,8000,true) and press ENTER.

Pr(80,000 < X <100,000)= 0.704

Therefore our answer is that 70.4% of trucks travel between 80,000
and 100,000 km per year

Example 4-10
A consultant is investigating the time it takes factory workers in a motorcycle assembly plant to
assemble a particular part after the workers have been trained to perform the task using an individually
based learning approach. The consultant determines that X, the time in seconds to assemble the part for
workers trained with this method is normally distributed with a mean of 75 seconds and a standard
deviation of 5 seconds.
(a)

Sketch the normal curve for the assembly time.

(b)

What is the probability that a randomly selected factory worker can assemble the part in
under 75 seconds?

(c)

What is the probability that a randomly selected factory worker can assemble the motor
cycle part in less than 70 seconds?

(d)

What percentage of factory workers can assemble the part in 75 to 85 seconds?

(e)

What is the probability that a randomly selected factory worker can assemble the part in 67
to 77 seconds?
Page | 21

Normal Probability Distribution

(f)

What is the interquartile range (in seconds) for factory workers to assemble the part?

Solution
(a)

(b)
Step 1:
Draw diagram
for
Pr(X 75)

Step 2:
Normdist function

We should expect the answer to be 0.5. Since the mean is 75 we

would expect half of the times to lie below this time.
This is an example of case 1 (see table on p.190), where we want to
calculate the area to the left of a value in a normal distribution.
Hence, in cell A1, type =normdist(75,75,5,true) and press
ENTER.

Pr(X 75) = 0.5

The probability that a randomly selected factory worker can assemble the part in under 75
seconds is 0.5.
(c)
Step 1:
Draw diagram
for
Pr(X 70)

We should expect the answer to be less than 0.5

22

Financial Statistics Notes

Step 2:
Normdist function

This is another example of case 1 where we want to calculate the

area to the left of a value in a normal distribution.
Hence, in cell A1, type =normdist(70,75,5,true) and press
ENTER.

Pr(X 70) = 0.159

The probability that a randomly selected factory worker can assemble the part in under 70
seconds is 0.159.

(d)
Step 1:
Draw diagram
for
Pr(X 75 X 85)

Step 2:
Normdist function

We should expect the answer to be less than 0.5

This is an example of case 3, where we want to calculate the area
between two values in a normal distribution. Therefore, we require
Pr(X 85) Pr(X < 75) in this case.
In this case, the mean = 75 and the standard deviation = 5. Hence,
in cell A1, type
=normdist(85,75,5,true) normdist(75,75,5,true) and press
ENTER.

Pr(75 X 85)= 0.477

47.7% of factory workers can assemble the part in 75 to 85 seconds.

(e)
Step 1:
Draw diagram
for
Pr(X 67 X 77)

Page | 23

Normal Probability Distribution

Step 2:
Normdist function

This is an example of case 3, where we want to calculate the area

between two values in a normal distribution. Therefore, we require
Pr(X 77) Pr(X < 67) in this case. Hence, in cell A1, type
=normdist(77,75,5,true) normdist(67,75,5,true) and press
ENTER.

Pr(67 X 77) = 0.601

The probability that a randomly selected factory worker can assemble the part in 67 to 77
seconds is 0.601
Parts (b) to (e) could also be calculated using normal distribution tables. For example, if we were to
solve part (e) above using the standard normal distribution table, we would calculate
Pr(67 < X < 77) = P(-1.6 < Z < 0.4) = P(Z < 0.4) P(Z < -1.6) = 0.6554 0.0548 = 0.6006
(f)

The interquartile range is the difference between the 25% and the 75% x-values, represented
by a and b in Figure 4.6.

Figure 4.6

There are two methods we could use to find the interquartile range.

Method 1: using the norminv command in Excel.

The values a and b can be found directly from using the norminv command in Excel. The logic of the
norminv command is similar to that of normsinv, except it applies to any normal distribution and
hence we need to specify the mean and standard deviation, in addition to the area to the left of our
required value. That is, the structure of the norminv command is
norminv(area to the left, mean, standard deviation).
Therefore, in this case,
a = norminv(0.25,75,5) = 71.63 seconds for the lower quartile and
b = norminv(0.75,75,5) = 78.37 seconds for the upper quartile.
The interquartile range (spanning the middle 50% of assembly times) is
78.37 71.63 = 6.74 seconds.

24

Financial Statistics Notes

Method 2: using the standard normal distribution table

Alternatively, we can find the interquartile range using the standard normal distribution table. To do
this, we first need to read off the required value of z from the table in each case (the value of z with an
area of 0.25 to the left of it for Q1 and the value of z with an area of 0.75 to the left of it for Q3 in the
standard normal distribution). The value for Q1 in the standard normal distribution is found to be
almost midway between z = -0.67 and z = -0.68 so we will take Q1 - 0.675. Similarly, Q3 0.675.
However, a and b are values (x) in a normal distribution with mean = 75 and standard deviation = 5,
so we need to convert the standardised (z) values for Q1 and Q3 into actual values (x) in our distribution
in order to find the values of a and b.
We know the general result that Z =

Re-arranging this formula we obtain X = + Z *

Hence a = 75 0.675 5 = 71.63 seconds
b = 75 + 0.675 5 = 78.38 seconds.
and IQR = 78.38 71.63 = 6.75 seconds.

Example 4-11
A college that specialises in training people for top level management positions administers various
types of physical and psychological tests. In one such test, objects must be assembled and pictures
arranged in order. Although the maximum possible score for this test is 140, the college has found that
results in the past have followed an approximately normal distribution with a mean of 100 and a
standard deviation of 10.
A company wishes to employ a very bright manager, someone who is in the top 10%. Find the cut off
score for a person in the top 10%, as measured by this test.

Page | 25

Normal Probability Distribution

Solution

Figure 4.7

The x value corresponding to the top 10% is found using =norminv(.9,100,10) =112.8 as we must use
the probability to the left of the x value, ie 1 .1 = .9.

The cut-off score for the psychological test is 112.8.

Alternatively, we could use statistical tables to find that z = 1.28 has an area of 0.9 to the left of
it. Using the formula X = + Z * we then obtain
X = 100 + 10 1.28 = 100 + 12.8 = 112.8

DO EXERCISE SET 4B ON PAGE 211

4.2.

References:

Anderson, D.R, et al Statistics for Business and Economics, Australian edition 1991.
Chapter 6, pages 168 - 179

Berenson, Levine, Krehbiel, Watson, Jayne and Turner, Basic Business Statistics: Concepts and
Applications, 2007, Prentice Hall

Part II, pages 160 190

Levine, D. M. Krehbiel, T. C., Berenson, M. L. Business Statistics: A First Course, Second

Edition 2000, Prentice Hall.
Chapter 4, pages 198 - 217

McLean, A., Stephens, B., Business Mathematics and Statistics, Longman 1996.
Chapter 21, pages 507 520

Selvanathan, A., Selvanathan, S., Keller, G., Warrack, B., Australian Business Statistics,
Abridged third edition, Nelson 2004.

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Chapter 5, pages 222 231

Waxman, P., Business Mathematics and Statistics, Third edition, 1993.

Chapter 20, pages 487 - 506

TERMS YOU SHOULD KNOW:

Normal random variable
Normal probability distribution
Standard normal probability distribution
Percentage one standard deviation either side of the mean: 68%
Percentage two standard deviations either side of the mean: 95%
Percentage three standard deviations either side of the mean: 99.7%

USEFUL FORMULA:
z=

4.3.

Exercises

EXERCISE SET 4A:

Solutions can be found on page 31
1. Sketch a normal curve for a random variable X that has a mean = 100 and a standard deviation
= 10. Label the horizontal axis with values of 70, 80, 90, 100, 110, 120 and 130.
2. Given that Z is the standard normal random variable, compute the following probabilities.

a. Pr (Z 1)
d. Pr(Z 2.5)

b. Pr (Z 1.5)

c. Pr (Z 2)

3. Given that Z is the standard normal random variable, compute the following probabilities.

a. Pr (Z - 1)
d. Pr(Z -2.5)

b. Pr (Z -1.5)
e. Pr (Z -3)

c. Pr (Z - 2)

4. Given that Z is the standard normal random variable, compute the following probabilities.

a. Pr (0 Z .83)
d. Pr (Z -.23)

b. Pr (-1.57 Z 0)
e. Pr (Z 1.20)

c. Pr (Z .44)
f. Pr (Z -.71)
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Normal Probability Distribution

5. Given that Z is the standard normal random variable, compute the following probabilities.

a. Pr ( - 1.98 Z .49)

b. Pr ( .52 Z 1.22)

c. Pr (-1.75 Z -1.04)

6. Given that Z is the standard normal random variable, find Z for each situation.

a.
c.
e.
g.
i.

The area to the left of Z is .6700.

The area to the right of Z is .6915.
The area to the left of Z is .2119.
The area between 0 and Z is .2291.
The area between - Z and Z is .95.

b.
d.
f.
h.
j.

The area to the left of Z is .9948.

The area to the right of Z is .1314.
The area between 0 and Z is .4750.
The area between - Z and Z is .90.
The area between - Z and Z is .99.

7. Given that Z is the standard normal random variable, find Z for each situation.

a. The area to the right of Z is .01.

c. The area to the right of Z is .05.

b. The area to the right of Z is .025.

d. The area to the right of Z is .10.

8. The demand for a new product is assumed to be normally distributed with = 200 and
= 40. Letting X be the number of units demanded, find the following:

a. Pr (X 250)
c. Pr ( 225 X 250)

b. Pr (X 100)
d. Pr (180 X 220)

9. When looking at the frequency distribution of a variable for which you have taken repeated
measurements, for example the daily output of a production line, what characteristics of the frequency
distribution may lead you to the conclusion that the variable is approximately normally distributed?

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EXERCISE SET 4B:

Solutions can be found on page 36

1.

The distribution of the number of visits to a doctor of people in their seventies is

approximately normally distributed with a mean =20 and a standard deviation =5 visits
per year.
(a) Draw the distribution of the number of visits to the doctor per year for this age group,
with an appropriate scale.
(b) Determine the percentage of people in their seventies who visit a doctor
(i)
between 5 and 35 times per year
(ii)
more than 25 times per year
(iii) less than 12 times a year
(iv)
between 10 and 27 times per year
(v)
between 7 and 17 times per year

2.

The life of a certain type of washing machine connector is normally distributed with a mean
life of 3.2 years and a standard deviation of 1.2 years. If this type of connector is
guaranteed for one year, what percentage of the original sales will require replacement?

3.

The Rural Bank is reviewing its service charges and interest-paying policies on cheque
accounts. The bank has found that the average daily balance on personal cheque accounts is
$550.00, with a standard deviation of $150.00. In addition, the average daily balances have
been found to be normally distributed.
(a) What percentage of personal cheque account customers carry average daily balances in
excess of $800.00?
(b) What percentage of the banks customers carry average daily balances below $200.00?
(c) What percentage of the banks customers carry average daily balances between $300.00
and $700.00?
(d) The bank is considering paying interest to customers carrying average daily balances in
excess of a certain amount. If the bank does not want to pay interest to more than 5% of
its customers, what is the minimum average daily balance it should be willing to pay
interest on?
The sales of High-Brite Toothpaste are believed to be approximately normally distributed,
with a mean of 10,000 tubes per week and a standard deviation of 1500 tubes per week.
(a) What is the probability that more than 12,000 tubes will be sold in any given week?
(b) In order to have a .95 probability that the company will have sufficient stock to cover
the weekly demand, how many tubes should be produced?

4.

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Normal Probability Distribution

5.

Figures on the residential property market in Melbourne over the past 100 years show the
annual return is normally distributed with mean 10.5 points and deviation 4.2 points.
(Note: the term point here is equivalent to percent, ie you can interpret one point as meaning
one percent.)
(a)
Sketch the distribution of annual return.
(b)
Find the probability that the residential property market will give a return of
(i)
More than 15 points.
(ii)
Less than 5 points.
(iii) Between 10 and 20 points.
(iv)
A negative return.
(c)
If the property market returns are only above the required rate of return for
professional investors 20% of the time, what is the required rate of return for
professional investors?

6.

Records kept by a producer of car tyres suggest that the distribution of the life of the tyres is
approximately normally distributed with a mean of 35,000 kilometres and a standard
deviation of 4000 kilometres.
(a)
What proportion of this companys tyres last
(i)
less than 30,000 kms
(ii)
less than 40,000 kms?
(b)
The companys advertising manager wishes to claim that 90% of our tyres last
longer than A kms. What should A be?

7.

A particular section of piping is mass produced. The distribution of the width of the piping
is approximately normal with a mean of 10 cms and a standard deviation of 0.025 cms.
Piping sections are discarded if the width exceeds 10.045 cms or is less than 9.955cms.
(a)
What proportion of piping sections have to be discarded?
(b)
How would this proportion decline if the standard deviation of the width were
reduced to 0.015 cms?

8.

Government officials estimate that the distribution of the Supplementary Security Income
(SSI) payments to those eligible is approximately normal with a mean of $120 per month
and a standard deviation of $35 per month.
(a)
What proportion of SSI recipients received
(i)
less than $100 per month?
(ii)
either less than $100 per month or more than $200 per month?
(b)
What is the 85th percentile of the distribution of SSI payments?
(c)
Interpret the number found in part (b) above.

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SOLUTIONS TO EXERCISES ON NORMAL DISTRIBUTION

Set 4A

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SOLUTIONS FOR NORMAL DISTRIBUTION EXERCISES

SET 4B:

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