INSEAD MBA

Uncertainty, Data & Judgment

Main Exercises for Session 3

3.1. Suppose that 20% of the people suffering from a certain disease are cured when treated
with a new drug. Use the table of binomial probabilities to find the probability that
among 15 randomly selected patients suffering from the disease:
a) Exactly 3 will be cured by the treatment.
b) Between 1 and 5 (1 and 5 inclusive) will be cured by the treatment.
c) More than 6 will be cured by the treatment.
d) Less than 5 will be cured by the treatment.

3.2. A particular analyst claims that she is good at picking “winners” in the US stock market,
defined here as stocks with annual returns in the top 10 percent of the population of all
stocks in the US. Having heard similar stories many times before, you are sceptical.
However, you are willing to give the analyst a chance. The analyst picks fourteen stocks
for you, and a year later four of them are in the top 10%. Assuming that the analyst is
really no better than chance (i.e., has a 10% chance of picking a winner), what is the
probability of observing exactly four winners in a sample of 14? What is the probability
of observing at least four winners?

3.3 U.S. News & World Report once reported that of the 900 diversified equity funds in
existence at the end of the year, only 14 managed to beat the S&P 500 year in, year out,
for six years in a row. That is, only 14 of the 900 equity fund managers were able to
outperform the S&P 500 in each of the previous six consecutive years. Suppose that
each fund manager uses a strategy that is no more sophisticated than the toss of a coin.
That is, a fund manager has exactly a 0.5 probability of beating the S&P 500 in any
given year, and the fund managers’ performance in any given year is independent of
their performance in any of the other years. What is then the probability that a fund
manager will beat the S&P 500 every year over six years? Further, based on this
probability, how many of the 900 fund managers would you expect to beat the S&P 500
in six out of six years?
3.4 On the basis of past data regarding sales, the owner of a car dealership finds that on
average 3.75 cars are sold per day on Saturdays and Sundays during the months of
January and February. The dealership is open for ten hours on Saturdays and on
Sundays. The sales rate is relatively stable for different hours of the day and purchases
appear to be independent of one another. The owner has no reason to believe that this
year’s car-selling process will be different from that in the past years covered by the
data. On Saturday, February 4, the dealership will open at 9am. What is the probability
that the first sale of the day will occur before 11am?

3.5 The number of incoming calls to a telephone switchboard can be modelled as a Poisson
random variable. Suppose that, on average, the switchboard receives 3 calls per minute.
a) Find the probability that at most 3 calls are received in a minute.
b) What is the probability that no calls are received in the next 30 seconds?

3.6 The time it takes a student to go from her house to school is normally distributed with a
mean of 20 minutes and a standard deviation of 5 minutes. Estimate the percentage of
the times she will be late for class if she leaves her house 30 minutes before the start of
class. If you were her, how much time would you allow to go to school each day?

3.7 (a) A spacecraft has ten rocket engines, at least nine of which must function properly on
takeoff for the craft to escape the atmosphere and avoid crashing back to earth.
Scientists have determined that each rocket has a 95% chance of working correctly on
takeoff. The probabilities are independent. What is the probability that the spacecraft
will take off successfully?

(b) A competing spacecraft has 100 smaller rockets, at least 90 of which must function
properly on takeoff to avoid falling back to Earth. Each of these rockets has a 95%
chance of working correctly on takeoff. The probabilities are independent. What is the
probability that the spacecraft will take off successfully? How does this compare with
your answer to part (a)?
 INSEAD MBA
Uncertainty, Data & Judgment

Exercises for Grading for Session 3

3.1G. Binomial distribution. One of the applications of machine learning is classifying

a) What is the expected number of the requests that will be classified correctly?
Answer Options: 1; 3; 5; 7; 9

b) What is the standard deviation of the number of the requests that will be classified
correctly? Please choose the closest number.
Answer Options: 0.1; 0.25; 0.5; 0.75; 0.95

c) What is the probability that all 10 user requests will be classified correctly? Please
choose the closest number.
Answer Options: 0.001; 0.04; 0.1; 0.2; 0.35; 0.65; 0.88

3.2G. Poisson distribution. In one region, every 2 months there are on average 5
attempts to break ATM for getting cash. Assume that all such attempts are independent.

a) What is the probability that during next month there will be no attempts to break
ATM?
Answer Options: 0.005; 0.08; 0.2; 0.587; 0.71; 0.88

b) What is the probability that during next three months there will be no more than one
attempt to break ATM?
Answer Options: 0.005; 0.08; 0.2; 0.587; 0.71; 0.88
 INSEAD MBA
Uncertainty, Data & Judgment

Supplementary Exercises for Session 3

3.1S Michèle Hibon works as a tutor for UDJ two hours per day, four days a week. On
average, about 6 students per hour come to see her, and the arrivals appear to be independent
and stationary (occur at a stable rate). Twenty minutes after the tutoring hours begin one day,
Michèle wants to take a coffee break for 15 minutes but doesn’t want to miss any students
who might come to see her. So, she wonders what are the chances than no students will arrive
during the next 15 minutes. Find this probability (a) if two students arrived in the past ten
minutes, and (b) if no students have come in to see her yet on this particular day.

3.2S The number of calls to a company’s toll-free number for customer service between 8 am
and 5 pm, a nine-hour day, averages 240 per day. The load is relatively stable throughout the
day and the calls appear to be independent. For the past year, approximately 30% of the calls
each day are complaints about product quality. These calls also occur independently at a
stable rate throughout the day. The CEO wants to personally hear some of the calls
concerning complaints about product quality. The CEO decides to listen in on all incoming
calls for a 15-minute period on a given day. What is the probability that the CEO will
encounter at least one caller complaining about product quality?

3.3S An architect designing the gymnasium at a university wants to make the interior doors
high enough so that 95% of the male students will have at least a 30 cm clearance. Assuming
that the heights of male students are normally distributed, with a mean of 179 cm and a
standard deviation of 8 cm, how high must the architect make the doors?

3.4S Use the normal approximation to estimate the probabilities in Exercise 3.1 (a) and (b). Is
the rule of thumb for applying the binomial distribution satisfied in this case? What can you
say about the differences between the probabilities found in Exercise 3.1 and the
approximations computed here?

3.5S An important quality characteristic for soft-drink bottlers is the amount of soft drink in
the bottle (just think what Pepsi could do if Coke bottles were sometimes only half full). In a
particular filling process (when working as usual), the number of ounces injected into a 33 cl
bottle is normally distributed with a mean of 33.00 cl and a standard deviation of 0.10 cl.
Bottles that contain less than 32.75 cl do not meet the bottler’s quality standard.

(a) What is the probability that a randomly selected bottle will fail to meet the quality
standard?
(b) When one of the filling system’s compressor fails, the distribution of the system
shifts to a normal distribution with a mean of 32.90 cl and a standard deviation of
0.60 cl. What is now the probability that a randomly selected bottle will fail to meet
the quality standard? If 20,000 bottles are filled with this faulty process, what is the
probability that more than 8,000 of them will fail to meet the quality standard?

3.6S Accurate sales forecast are critical in ensuring efficient production and distribution of a
product. However, you have found that your analyst’s sales forecast are often off the mark.
Reviewing her forecasts for the past few years, it appears to you that her errors (in percentage
terms) are normally distributed with a mean of 0 percent and a standard deviation of 10
percent.

(a) If you obtain one sales forecast from the analyst, what is the probability that her
forecast is inaccurate by more than 15 percent?
(b) As part of an incentive scheme for encouraging accurate forecasts, you decide to
offer the analyst a SGD 1,000 bonus when she gives accurate forecasts: she will
receive the bonus if her error, in any direction (+ or -), is at most c percent. You
want to choose this cutoff c so that, at the current accuracy levels, only 5 percent of
her forecasts will earn the bonus. What value of c should you use?