Week 3 Annotated

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
ACTL2002/ACTL5101 Probability and Statistics

c Katja Ignatieva

School of Risk and Actuarial Studies
Australian School of Business
University of New South Wales
k.ignatieva@unsw.edu.au
Week 3 Video Lecture Notes

Week 2
Week 3
Week 4
Probability: Week 1
Week 6
Review
Estimation: Week 5
Week
7
Week
8
Week 9
Hypothesis testing:
Week
10
Week
11
Week
12
Linear regression:
Week 2 VL
Week 4 VL
Week 5 VL
Video lectures: Week 1 VL

Numerical methods to summarize data
Introduction
Special sampling distributions & sample mean and variance

Introduction
Measures of location & spread
Numerical example
Graphical procedures to summarize data

Summarizing data

Introduction
Population vs sample
Population: the large body of data;
Sample: a subset of the population.
Question: For the following four cases would we refer to a

population or sample:
1.
2.
3.
4.
All the actuaries in Australia;

The temperature on 5, randomly chosen, days;
All NSW cars;
The basket of goods of each fifth customer on a given day.
Solution: 1. Population; 2. Sample; 3. Population 4. Sample.

402/420

Introduction
Summarising data: Numerical approaches

Given a set of observations x1 , x2 , x3 , . . . , xn selected from a
population (usually assumed i.i.d. (independent and identically
distributed)).
Sorted data in ascending order: x(1) , x(2) , . . . , x(n) , such that
x(1) is the smallest and x(n) is the largest.
Objectives:
- Understand the main features of data and to summarise data
(essential first step in analysing data);
- Make inferences about the population
(more on this later in the course).
403/420


Introduction
Numerical example

Summarizing data

Measures of location
Used to estimate the central point of the sample, also called
measures of central tendency:
The sample mean is given by:
x=
n
1 X
xk
n
k=1
The population mean is given by:

X
x =
pX (x) x
all x
100% trimmed mean, the average of the observations after

discarding the lowest 100% and highest 100%:
x(bnc+1) + . . . + x(nbnc)
e
x =
,
n 2bnc
404/420
where bnc is the greatest integer less than or equal to n.

Measures of spread
The sample variance:
s2 =
n
X
1
1
(xk x)2 =
n1
n1
k=1
!
n
X
1
xk2 n x 2 .
n1
n
X
xk2 +
k=1
n
X
k=1
x2 2
n
X
!
xk x
k=1
k=1
The population variance:

X
X
2 = Var (X ) =
pX (x) (x X )2 =
pX (x) x 2 2X
all x
all x
s 2.
Population standard deviation: = 2 .

Sample standard deviation: s =
405/420

Quantiles
P , th quantile or ( 100)th percentile:
1
1
[number of xk <P ] [number of xk P ]
n
n
approximated by linear interpolation as the ((n 1) + 1)th
observation.
Quartiles: Q1 (25th percentile) and Q3 (75th percentile).
Quantile function: FX1 (u), u [0, 1], where FX (x) = u.
Question: What are the 0.025, 0.16, 0.5, 0.84 and 0.975
quantiles of the N(0,1) distribution?
406/420
Solution: They are -1.96, -1, 0, 1 and 1.96, respectively.

Mode: The mode m is the value that maximises the p.m.f.

pX (x) in the discrete case or the p.d.f. fX (x) in the
continuous case.
Median, M:
x n+1 ,
if n is odd;
(
2 )

M=
12 x n + x n +1 , if n is even.
( )
(
)
2
Median absolute deviation:

MAD = median of the numbers:{|xi M|}.
Range:
R = x(n) x(1) .
Interquartile range:
IQR = Q3 Q1 .
407/420

Numerical example

Introduction
Numerical example

Summarizing data

Numerical example
Numerical example
An insurance company has occurred the 26 claims with the
following amounts:
1 120
990
450
478
1 000
975
1 000
584
760
346
2 430
1 406
348
1 100
1 245
760
1 548
752
850
1 000
with
26
P
xi
= 25 855;
i=1
26
P
xi2 = 36 904 873.
i=1
408/420
3 400
335
605
588
1 245
540

Numerical example
Numerical example
First step: arrange in ascending order:

335
346
348
450
478
540
584
409/420
588
605
752
760
760
850
975
990
1 000
1 000
1 000
1 100
1 120
1 245
1 245
1 406
1 548
2 430
3 400

Numerical example
Numerical example
Some statistics:
Mean:
x=
n
1 X
25 855
xi =
= 994.42.
n
26
i=1
Variance:
s2 =
n1
n
X
!
xi2 n x 2
i=1

1
36 904 873 26 (994.42)2
=
25
= 447, 762.6.
Standard deviation:
s=
410/420
447 762.6 = 669.2.

Numerical example
Numerical example
Determine P0.35 , i.e., the 35th percentile (0.35 quantile)

This is the (25 (0.35)) + 1 = 9.75th observation.
Then, linear interpolation gives:
P0.35 = x(9) + 0.75 x(10) x(9)
= 605 + 0.75 (147) = 715.25

= 0.25 x(9) + 0.75 x(10)
411/420

Numerical example
Numerical example
Recall: x(1) = 335
and
x(26) = 3, 400.
Range:
R = 3, 400 335 = 3, 065.
Quartiles:
Q1
= x(250.25+1)
= x(6.25)
= 0.75x(6) + 0.25x(7)
= 585
Q2
= M = x(250.5+1)
= x(13.5)

= x(13) + x(14) /2
= 912.5
Q3
= x(250.75+1)
= x(19.75)
= 0.25x(19) + 0.75x(20)
= 1, 115
Interquartile range:
IQR = Q3 Q1 = 1, 115 585 = 530.
412/420

Numerical example
Numerical example
Determine the 10% trimmed mean:

Step 1: Compute bnc = b26 (0.1)c = 2.
Hence, we should discard the 2 smallest and the 2 largest of
the observations.
Step 2: Compute the trimmed mean:
e
x0.10 =
413/420
x(3) + . . . + x(24)
= 879.27.
22

Summarizing data

Introduction
Numerical example

Summarizing data

Summarizing data
Empirical cumulative distribution function (ecdf)

Given a set of observations x1 , . . . , xn the empirical cumulative
distribution function is given by:
1
Fn (x) = (number of observations IXk x )
n
E[Fn (x)] =FX (x)
1
Var (Fn (x)) = FX (x) (1 FX (x)) .
n
Note: pn (x) = IXk =x /n, the proportion of observations equal
to x.
414/420
Proves for E[Fn (x)] and Var (Fn (x)) are not part of the
course.

Summarizing data
E.c.d.f.
1
0.9
Data:
0.8
335
450
584
752
850
1000
1100
1245
2430
0.7
F26(x)
0.6
0.5
0.4
0.3
0.2
0.1
0
0
415/420
500
1000
1500
2000
Claim amount
2500
3000
3500
346
478
588
760
975
1000
1120
1406
3400
348
540
605
760
990
1000
1245
1548

Summarizing data
Histogram
14
Data:
12
335
450
584
752
850
1000
1100
1245
2430
Frequency
10
8
6
4
2
0
0
416/420
500
1000
1500
2000
Claim amount
2500
3000
346
478
588
760
975
1000
1120
1406
3400
3500
Quant the number of observations in each bin (0, 500], (500, 1000],
(1000, 1500], (1500, 2000], (2000, 2500], (2500, 3000], (3000, 3500].
Bin sizes chosen such that it provides good summary of the data, i.e., not
too short and not too long.
348
540
605
760
990
1000
1245
1548

Summarizing data
Stem-and-leaf display
Data:
Stem-and-leaf:
0
0
1
1
2
2
3
417/420
|
|
|
|
|
|
|
333
5556668889
0000011224
5
4
4
335
450
584
752
850
1000
1100
1245
2430
346
478
588
760
975
1000
1120
1406
3400
Each row corresponds to a bin.

The number before | displays the number of thousands (or hundreds/tens
etc.).
Each number after | displays the 3rd (or 2nd /1st ) digit of an observation.
Note: rounding!
348
540
605
760
990
1000
1245
1548

Summarizing data
Boxplot (Box-and-Whiskers plot)

Boxplot
3500
Data:
3000
Claim size
2500
2000
1500
1000
500
335
450
584
752
850
1000
1100
1245
2430
418/420
Red line: median; Blue box: Q1 and Q3 (height of box: IQR)

Black lines: 10th and 90th percentile
Red circles: outliers.
346
478
588
760
975
1000
1120
1406
3400
348
540
605
760
990
1000
1245
1548

Summarizing data
Q-Q plot calculations

This is done by plotting the quantile function of your chosen
distribution against the order statistics, x(i) .
A small continuity adjustment is made, too.
For the example above, a standard normal Q-Q plot, we have:
i
1
2
25
26
i0.5
26
x(i)
419/420
i0.5
26
0.019 2
0.057 7
0.942 3
0.980 8
-2.069 9
-1.574 4
1.574 4
2.069 9
335
346
2 430
3 400

Summarizing data
Q-Q plot (quantile-quantile plot)

QQ plot
2.5
Data:
Standard normal quantiles
1.5
335
450
584
752
850
1000
1100
1245
2430
1
0.5
0
0.5
1
1.5
2
2.5
0
420/420
500
1000
1500
2000
Claim size
2500
3000
346
478
588
760
975
1000
1120
1406
3400
3500
Q-Q plot displays if a distribution is a correct approximation and/or when

not (tails).
Calculations: see previous slide.
348
540
605
760
990
1000
1245
1548
ACTL2002/ACTL5101 Probability and Statistics: Week 3
ACTL2002/ACTL5101 Probability and Statistics

c Katja Ignatieva

School of Risk and Actuarial Studies
Australian School of Business
University of New South Wales
k.ignatieva@unsw.edu.au
Week 3
Week 2
Week 4
Probability: Week 1
Week 6
Review
Estimation: Week 5
Week
7
Week
8
Week 9
Hypothesis testing:
Week
10
Week
11
Week
12
Linear regression:
Week 2 VL
Week 3 VL
Week 4 VL
Video lectures: Week 1 VL
Week 5 VL
Last two weeks

Introduction to probability;
Definition of probability measure, events;
Calculating with probabilities; Multiplication rule,
permutation, combination & multinomial;
Distribution function;
Moments: (non)-central moments, mean, variance (standard
deviation), skewness & kurtosis;
Generating functions;
Special (parametric) univariate distributions.
501/562
This week
Joint probabilities:
- Discrete and continuous random variables;
- Bivariate and multivariate random variables;
Covariance;
Correlation;
Law of iterative expectations;
Conditional variance identity.
502/562

The Bivariate Case
Introduction
Joint & Multivariate Distributions

The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary

The Bivariate Case
Introduction
The Bivariate Case

We are often interested in the joint behavior of two (or more)
random variables.
Denote a bivariate random vector by a pair as follows:
X = [X1 , X2 ]> . The joint distribution function of X is:
FX1 ,X2 (x1 , x2 ) = Pr (X1 x1 , X2 x2 ) .
We can write:
Pr (a1 X1 b1 , a2 X2 b2 ) =FX1 ,X2 (b1 , b2 )
FX1 ,X2 (b1 , a2 )
FX1 ,X2 (a1 , b2 )
+ FX1 ,X2 (a1 , a2 ) .
503/562

The Bivariate Case
Introduction
Discrete Random Variables

In the case where X1 and X2 are both discrete random
variables which can take values
x11 , x12 , . . .
and
x21 , x22 , . . .
respectively, we define:
pX1 ,X2 (x1i , x2j ) = Pr (X1 = x1i , X2 = x2j ) ,
for i, j = 1, 2, . . .
as the joint probability mass function of X , then:

X
X
i=1 j=1
504/562
pX1 ,X2 (x1i , x2j ) = 1.

The Bivariate Case
Introduction
Discrete Random Variables

The marginal p.m.f. of X1 and X2 are respectively
pX1 (x1i ) =
pX1 ,X2 (x1i , x2j )
j=1
and
pX2 (x2j ) =
pX1 ,X2 (x1i , x2j ) .
i=1
(sum over the other random variable(s)).

Prove: use Law of Total Probability.
505/562

The Bivariate Case
Introduction
Example discrete random variables

An insurer offers both disability insurance (DI) and
unemployment insurance (UI) to small companies.
Most companies buy DI and UI, because of a large discount.
The claims are categorized in no claims, mild claims, and
severe claims.
Last year the 100 insured felt in the following categories:
DI
UI
#
506/562
no
no
74
no
mild
6
no
severe
2
mild
no
3
mild
mild
2
mild
severe
4
severe
no
1
severe
mild
3
Question: Find the marginal p.m.f. of DI and UI.

no
mild
Solution: x
74+6+2
3+2+4
pDI (x)
= 0.82
100
100 = 0.09
6+2+3
pUI (x) 74+3+1
=
0.78
100
100 = 0.11
severe
severe
5
severe
= 0.09
= 0.11
1+3+5
100
2+4+5
100

The Bivariate Case
Introduction
Continuous Random Variables

In the case where X1 and X2 are both continuous random
variables, we set the joint density function of X as
fX1 ,X2 (X1 , X2 ) =

FX ,X (x1 , x2 )
x1 x2 1 2
and therefore the joint cumulative density function is given by:

Z x2 Z x1
FX1 ,X2 (x1 , x2 ) =
fX1 ,X2 (z1 , z2 ) dz1 dz2 .
Note:
Z
FX1 ,X2 (, ) =
FX1 ,X2 (, ) =
507/562
fX1 ,X2

Z Z
(z1 , z2 ) dz1 dz2 = 1
fX1 ,X2 (z1 , z2 ) dz1 dz2 = 0.

The Bivariate Case
Introduction
Continuous Random Variables

The marginal density function of X1 and X2 are respectively:
Z
Z
fX1 ,X2 (z1 , x2 ) dz1 .
fX1 (x1 ) =
fX1 ,X2 (x1 , z2 ) dz2 and fX2 (x2 ) =
The marginal cumulative distribution function of X1 and X2

are then respectively:
Z x1
Z x2
FX1 (x1 ) =
fX1 (u) du
and
FX2 (x2 ) =
fX2 (u) du,
or, alternatively:
Z
FX1 (x1 ) =
and FX2 (x2 ) =
508/562
x1
fX (u1 , u2 ) du1 du2
Z
x2 Z
fX (u1 , u2 ) du1 du2 .

The Bivariate Case
Introduction
Continuous Random Variables: example

The joint p.d.f. of X and Y is given by:
fX ,Y = 4 x (1 y ),
for 0 x, y 1, and 0 otherwise.

R
a. The marginal p.d.f. of X is: fX (x) = fX ,Y (x, y )dy =

R1
2 1
0 4 x (1 y )dy = 4 x (y 1/2 y ) 0 = 2x.
509/562
b. The marginal
x
R x c.d.f. of X Ris:x
FX (x) = fX (z)dz = 0 2zdz = z 2 0 = x 2 , if 0 x 1
and zero if x < 0 and one if x > 1.
R
c. The marginal p.d.f. of Y is: fY (y ) = fX ,Y (x, y )dx =

1
R1
2
0 4 x (1 y )dx = 1/2 4 x (1 y ) 0 = 2(1 y ).
Ry
d. The marginal c.d.f. of Y is: FY (y ) = fY (z)dz =

Ry
2 y
2
0 2(1 z)dz = 2z z 0 = 2y y , if 0 y 1 and zero
if y < 0 and one if y > 1.

The Bivariate Case
Exercises

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

The Bivariate Case
Exercises
Exercise: Discrete case

Let X be the random variable taking one if there is a positive
return on the asset portfolio and zero otherwise.
Let Y be the random variable for the claims for home
insurance, which can take value 0, 1, 2, and 3 for few, normal,
many claims and a large number of claims due to floods,
respectively.
The marginal probability mass functions of X and Y are:
X =x
0
1
510/562
Pr (X = x)
1/2
1/2
and
Y =y
0
1
2
3
Pr (Y = y )
1/8
3/8
3/8
1/8
Question: What would be the joint probability density

function if X and Y are independent?

The Bivariate Case
Exercises

Solution: If the two are independent, we would have:
Pr (X = x, Y = y ) = Pr (X = x) Pr (Y = y )
For all X = x and Y = y the joint distribution, if they are
independent, is described in the table below:
Pr(X = x, Y = y )
X =x
0
1
511/562
0
1/16
1/16
Y =y
1
2
3/16 3/16
3/16 3/16
3
1/16
1/16

The Bivariate Case
Exercises

Suppose instead they are not independent and their joint
distribution could be described as:
Pr(X = x, Y = y )
X =x
0
1
0
0
1/8
Y =y
1
2
3/16 3/16
3/16 3/16
3
1/8
0
Question: Proof that X and Y are dependent.

Solution: We have Pr(Y = 3) = 1/8 and Pr(X = 1) = 1/2,
however Y takes the value 3 the probability that X takes the
value 1 is zero (joint probability of Y = 3 and X = 1 is zero).
512/562

The Bivariate Case
Exercises
Example: Multinomial distribution

Suppose we have n independent trials with r outcomes with
probabilities p1 , p2 , . . . , pr .
The joint frequency distribution is given by:
pN1 ,N2 ,...,Nr (n1 , n2 , . . . , nr ) =
n!
p n1 p2n2 . . . prnr .
n1 ! n2 ! . . . nr ! 1
The marginal distribution is (Binomial distribution!) given by:

X
X
X X
pNi (ni ) =
,...,
,
,...,
pN1 ,N2 ,...,Nr (n1 , n2 , . . . , nr )
N1
Ni1 Ni+1
Nr

n
=
pini (1 pi )nni .
ni
Can do this by summing the marginals.
* Using Binomial expansion (prove not required).
513/562

The Bivariate Case
Exercises
Exercise: Continuous case

Now consider an example of a bivariate random vector
[X , Y ]> whose joint density function is:

fX ,Y (x, y ) = c x 2 + xy ,
for 0 x 1 and 0 y 1,
and zero otherwise. To find the constant c, it must be a valid
density so that:
Z Z
Z 1Z 1

1=
fX ,Y (x, y ) dxdy =
c x 2 + xy dxdy
Z
=c
0
1
1 3 1 2
x + x y
3
2
1
1
1
dy =c y + y 2
3
4
0
1
=c
0
Hence, c = 12/7, then also fX ,Y (x, y ) 0 for all x, y .

a. Question: Find the marginal densities.
514/562
b. Question: Find the joint distribution function.
7
.
12

The Bivariate Case
Exercises

a. Solution: Knowing the constant, we can then determine the
marginal densities. First the marginal density for X :
Z
Z 1

12 2
x + xy dy
fX (x) =
fX ,Y (x, y )dy =
0 7

12
1
=
x 2 + x , for 0 x 1,
7
2
and zero otherwise, and for Y :
Z
Z 1

12 2
fY (y ) =
fX ,Y (x, y )dx =
x + xy dx
0 7

12 1 1
=
+ y , for 0 y 1,
7 3 2
515/562
and zero otherwise.

The Bivariate Case
Exercises

b. Solution: You can also determine the joint distribution
function if 0 x 1, 0 y 1 by:
Z y Z x
Z yZ x

12 2
u + uv dudv
FX ,Y (x, y ) =
fX ,Y (u, v )dudv =

0
0 7
x

Z y
Z y
12 1 3 1 2
12 1 3 1 2
dv =
=
u + u v
x + x v
7 3
2
3
2
0 7
0
0

y

12 1 3
1
12 1 3
1
=
x v + x 2v 2
=
x y + x 2y 2 .
7 3
4
7 3
4
0
Hence:
FX ,Y
516/562
0,
12
if x < 0 or y < 0;
1 2 2
+
x
y
, if 0 x 1, 0 y 1;
7
4
(x, y ) =
F (x) ,
if y > 1;
X
FY (y ) ,
if x > 1.
1 3
3x y

The Bivariate Case
Exercises

joint p.d.f.
marginal p.d.f.
1.5
1
0.5
0
0.5
1.5
FX(x)
FX,Y(x,y)
1.5
0.5
0
1
1
0.5
0
0 0.5
y0.5 0.5
x
1.5
0.5
0.5
1.5
0.5
0.5
F (y)
marginal p.d.f.
1.5
0
0.5
0.5
517/562
0.5
1
x
slide 519
1.5
0
0
0.5
y
1.5
0.5
0.5
0.5
x
1.5

The Bivariate Case
Exercises

You can then determine the marginal distributions:
0,
if x < 0;
12 1 3
1 2
FX (x) = FX ,Y (x, 1) =
x + 4 x , if 0 x 1;
7 3
1,
if x > 1,
and
FY (y ) = FX ,Y (1, y ) =
0,
12
7
1,
1
3y
1 2
4y
if y < 0;
, if 0 y 1;
if y > 1.
Can you confirm the marginal densities are correct?

518/562

The Bivariate Case
Exercises

It becomes straightforward to compute probability statements such
as (using lower right panel on slide 517):
Z
1Z y

12 2
x + xy dxdy
0
0 7
y
Z 1 3
x
x 2y
12
+
dy
=
7
3
2
0
0

Z 1 3
y
12
y3
=
+
dy
7
3
2
0

1
Z 1
12 5 y 4
5
12 5 3
y dy =
= ,
=
7
6
7
6
4
14
0
0
R R
so that Pr (X > Y ) = y fX ,Y (x, y )dxdy = 9/14.
Pr (X < Y ) =
519/562

The Bivariate Case

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

The Bivariate Case
Means
Consider the bivariate random vector X = [X1 X2 ]> .
The mean of X is the vector whose elements are the means of
X1 and X2 , that is,

E [X1 ]
1
=
.
E[X ] =
E [X2 ]
2
If X1 , X2 , . . . , Xn are jointly distributed random variables with
expectations E [Xi ] for i = 1, . . . , n and Y is a affine function
of the Xi , i.e.,
n
X
Y =a+
bi Xi ,
i=1
then, we have the additively rule:

"
#
n
n
n
X
X
X
E [Y ] =E a +
bi Xi = a +
E [bi Xi ] =a +
bi E [Xi ] .
520/562
i=1
i=1
i=1

The Bivariate Case
Variances, Covariances
Recall: variance of X is a measure for the spread of X .
Covariance is a measure of the spread between X1 and X2 .
The variance of the random vector X is also called the
variance-covariance matrix:

2

Var (X1 )
Cov (X1 , X2 )
1 12
Var (X ) =
=
,
Cov (X1 , X2 )
Var (X2 )
12 22
where the covariance is defined as:
Cov (X1 , X2 ) 12 =E [(X1 1 ) (X2 2 )]
=E [X1 X2 X1 2 1 X2 + 1 2 ]
=E [X1 X2 ] E [X1 ] E [X2 ] .
521/562
Note: Cov (Xi , Xi ) = ii = i2 , and covariance only defined

for two r.v..

The Bivariate Case
Example: Consider the example from slide 506.

Let no=0, mild=1, and
severe=2.
0.8
Question: Calculate the mean of

X1 = DI and X2 = UI .
0.6
0.4
Solution:
E [X1 ] = 3+2+4
100 1 +
6+2+3
E [X2 ] = 100 1 +
0.2
0
2 = 0.27.
2 = 0.33.
Question: Calculate the covariance

between X1 and X2 .
No
Mild
Severe
Mild
Severe
UI
522/562
1+3+5
100
2+4+5
100
No
DI
Question: Is covariance
positive or negative?
Solution:
E [X1 X2 ] = 0.02 1 1 + 0.04 1 2 +
0.03 2 1 + 0.05 2 2 = 0.36.
Cov (X1 , X2 ) = E [X1 X2 ] E [X1 ]
E [X2 ] = 0.36 0.27 0.33 = 0.2709.

The Bivariate Case
Example: Consider the example from slide 509.

Question: Calculate the means.
R
Solution: E [X1 ] = x fX (x)dx =
R1 2
3 1
0 2x dx R= [2/3 x ]0 = 2/3.
R1
E [X2 ] = y fY (y )dx = 0 y 2
(1 y )dy = [y 2 2/3y 3 ]10 = 1/3.
fX,Y(x,y)
3
2
Question: Calculate the covariance

between X1 and X2 .
1
0
1
1
0.5
y
523/562
0.5
0 0
Question: Is covariance
positive or negative?
Solution:
R R
E [X1 X2 ] = fX ,Y (x, y ) x
R1R1
ydxdy = 0 0 4 x 2 (y y 2 )dxdy =
R1
2
0 4/3(y y )dy = 4/6 4/9 = 4/18.
Cov (X1 , X2 ) = E [X1 X2 ] E [X1 ]
E [X2 ] = 4/18 2/3 1/3 = 0.

The Bivariate Case
524/562
Let X Beta(0.2, 1) (prob of a claim) and Y |X NB(3, X )

(Y Beta-Negative-Binomial). Home insurance, insured qualified
as bad risk if 3 claims within 50 quarters.
Question: Does it have a negative or positive covariance?

The Bivariate Case
Properties of Covariance
If X and Y are jointly distributed random variables with
expectations X and Y the covariance of X and Y is
Cov (X , Y ) =E [(X X ) (Y Y )]
=E [X Y X Y Y X + X Y ]
=E [X Y ] X Y .
If X and Y are independent:
Cov (X , Y ) = E [X Y ] X Y = E [X ] E [Y ] X Y = 0.
* using independence X , Y .
525/562

The Bivariate Case
Let X , Y , Z be random variables, and a, b < we have:
Cov (a + X , Y ) =E [(a + X (a + X )) (Y Y )]
=E [(X X ) (Y Y )]
=Cov (X , Y )
Cov (a X , b Y ) =E [(a X a X ) (b Y b Y )]
=E [a (X X ) b (Y Y )]
=a b E [(X X ) (Y Y )] = a b Cov (X , Y )
Cov (X , Y + Z ) =E [(X X ) (Y + Z Y Z )]
=E [(X X ) ((Y Y ) + (Z Z ))]
=E [(X X ) (Y Y ) + (X X ) (Z Z )]
=Cov (X , Y ) + Cov (X , Z ) .
526/562

The Bivariate Case
Suppose X1 , X2 ,Y1 and Y2 are r.v., and a, b, c, d <, then:
Cov (aX1 + bX2 , cY1 + dY2 ) =Cov (aX1 + bX2 , cY1 )

+ Cov (aX1 + bX2 , dY2 )
=Cov (aX1 , cY1 ) + Cov (aX1 , dY2 )

+ Cov (bX2 , cY1 ) + Cov (bX2 , dY2 )
=acCov (X1 , Y1 ) + adCov (X1 , Y2 )

+ bcCov (X2 , Y1 ) + bdCov (X2 , Y2 ) .
* using: Cov (X , Y + Z ) = Cov (X , Y ) + Cov (X , Z ).
** using: Cov (aX , bY ) = abCov (X , Y ).
527/562

The Bivariate Case
Let Xi , Yi be r.v., a, bi , c, dj < for i = 1, . . . , n and
j = 1, . . . , m.
We can generalize this as follows:
Suppose:
U =a+
n
X
bi Xi
and
i=1
V =c+
m
X
dj Yj .
j=1
Then:
Cov (U, V ) =
n X
m
X
i=1 j=1
528/562
bi dj Cov (Xi , Yj ) .

The Bivariate Case
Note that Cov (X , X ) = Var (X ), so we have the variance of
the sum of r.v. is:
Var (X1 + X2 ) =Cov (X1 + X2 , X1 + X2 )
=Cov (X1 , X1 ) + Cov (X2 , X2 ) + 2Cov (X1 , X2 )
=Var (X1 ) + Var (X2 ) +2Cov (X1 , X2 ).
Also,
Var (aX1 ) = Cov (aX1 , aX1 ) = a2 Cov (X1 , X1 ) = a2 Var (X1 ) ,
using the result that we can take a constants out of a
covariance.
529/562

The Bivariate Case
Example Covariance
Consider the example from slides 506 and 522.
The costs for disability insurance are $1 million if mild and $2
million if severe.
The costs for unemployment insurance are $0.5 million if mild
and $1 million if severe.
The price of the contract is the expected value plus half the
standard deviation.
530/562
Question: What is the price for DI, UI, and DI and UI

combined?

1+3+5
2
2
Solution:
E X12 = 3+2+4
100 1 + 100 2 = 0.45 and
2 6+2+3
2+4+5
2
2
E X2 = 100 1 + 100 2 = 0.55.

Var (X1 ) = E X12 (E [X1 ])2 = 0.45 0.272 = 0.3771 and

Var (X2 ) = E X22 (E [X2 ])2 = 0.55 0.332 = 0.4411.

The Bivariate Case
Solution (cont.)
Price DI (=1 million X1 ):
p
Var (X1 million)/2
q
=E [X1 ] million + Var (X1 ) million2 /2
p
=0.27million + 0.3771 million2 = 0.5770million.
Price DI =E [X1 million] +
Price UI (=0.5 million X2 ):

p
Var (X2 0.5 million)/2
q
=E [X2 ] 0.5 million + Var (X2 ) 0.25 million2 /2
p
=0.165million + 0.4411 0.25 million2 /2
Price UI =E [X2 0.5 million] +
=0.3310million.
531/562

The Bivariate Case
Solution (cont.)
Price DI and UI combined (=1 million X1 + 0.5 million
X2 ):
Price UI and DI =E [X1 million + X2 0.5 million]
p
+ Var (X1 million + X2 0.5 million)/2
=E [X1 ] million + E [X2 ] 0.5 million
q
+ Var (X1 ) million2 + Var (X2 ) 0.25 million2
+2Cov (X1 , X2 )0.5 million2 /2
=0.27million + 0.165million
q
+ (0.3771 + 0.441/4 + 0.2709) million2 /2
=0.8704million.
532/562
This gives a 4.15% discount!

The Bivariate Case

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

The Bivariate Case
Large covariance: high dependency or large variance?
We define the correlation coefficient between X1 and X2 :
(X1 , X2 ) p
Cov (X1 , X2 )
Var (X1 ) Var (X2 )
provided Cov (X1 , X2 ) exists and the variances Var (X1 ) and
Var (X2 ) are each non-zero.
The value of the correlation coefficient is always between 1
and 1, i.e.
1 (X1 , X2 ) 1.
Note: correlation coefficient is only defined for 2 r.v..
533/562
Prove: see next slides.

The Bivariate Case
Prove: Let Y =
X1
1
X2
2 ,
Var (Y ) 0 we have:

X1 X2
0 Var
1
2

X2
X1 X2
X1
+ Var
2Cov
,
=Var
1
2
1 2
1
1
1 1
= 2 Var (X1 ) + 2 Var (X2 ) 2
Cov (X1 , X2 )
1 2
1
2
|
{z
}
|
{z
} |
{z
}
=1
=1
Var (X1 )Var (X2 )

=
1 2
=2 (1 ) .
Consequently, we see that 1 because the variance of a
random variable is non-negative.
Proof continues next slide.
534/562

The Bivariate Case
Similarly by considering Y =

0 Var
X1
1
X1 X2
+
1
2
X2
2 ,
Var (Y ) 0 we have:

= 2 (1 + ) ,
we see that 1, which proves the result.
The correlation coefficient gives a measure of the linear

relationship between the two variables. In fact, = 1 gives:
Pr (X2 = aX1 + b) = 1
for some constants a 6= 0 and b so that you can write an
affine relationship between the two.
535/562
Question: Does a correlation of zero implies independence?

Solution:

The Bivariate Case
Note that we have that if X , Y are independent, then

Cov (X , Y ) = 0, hence:
Cov (X , Y )
0
(X , Y ) = p
=p
= 0.
Var (X ) Var (Y )
Var (X ) Var (Y )
However, the reverse does not need to hold.
Let X , Y be r.v. with j.p.m.f. (we have set X = Y 2 ):
Pr(X = x, Y = y )
X =x
0
1
1
0
1/3
Y =y
0
1
1/3
0
0
1/3
We have E [Y ] = 0, E [X ] = 2/3, and E [XY ] = 0. We have:

Cov (X , Y )
E [XY ] E [X ] E [Y ]
(X , Y ) = p
= p
= 0.
Var (X ) Var (Y )
Var (X ) Var (Y )
536/562

The Bivariate Case
6
5
4
3
quadratic dependence
linear dependence
1
0
1
2
1.5
537/562
0.5
=0
0.5
1
X
=0.9
=0.9
1.5
=0
2.5

The Bivariate Case

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

The Bivariate Case
Conditional Distributions: Discrete case

Let X , Y be random variables with j.p.m.f.
Pr (X = xi , Y = yj ).
The conditional probability of X given Y is:
Pr (X = xi |Y = yj ) =
Pr (X = xi , Y = yj )
.
Pr (Y = yj )
If Pr (Y = yj ) = 0, then we define Pr (X = xi |Y = yj ) = 0.
Example: Let X POI(3), Y POI(2), and X and Y are
independent.
We have:
Pr(X = 2|Y = 3)=
538/562
Pr(X = 2, Y = 3) Pr(X = 2) Pr(Y = 3)

=
=Pr(X = 2).
Pr(Y = 3)
Pr(Y = 3)

The Bivariate Case
Conditional Distributions: Continuous case

Let X , Y be random variables with j.p.d.f. fX ,Y (x, y ).
The conditional density of Y given X is:
fY |X (y |x) =
fX ,Y (x, y )
fX (x)
If fX (x) = 0, then we define fY |X (y |x) = 0.

Example: consider the example from slide 509.
Question: Find fX |Y (x|y = 0.5)
Solution: fX |Y (x|y = 0.5) =
539/562
fX ,Y (x,0.5)
fY (0.5)
2x
1
= 2x.

The Bivariate Case
Application: an imperfect particle counter

Define the random variable N as the number of incoming
claims and X as claims paid. Probability of a fraudulent claim
is q = 1 p and number of claims paid is Binomial:
(X |N = n) Binomial (n, p) .
If the number of incoming claims follows a Poisson
distribution (with parameter ) then the number of claims
paid turns out to also be Poisson with parameter p. This is
an example of thinning of a Poisson probability.
We will see more on thinning of a Poisson probability in
ACLT2003/5103 using Markov chains.
Proof: See next slides.
540/562

The Bivariate Case

Proof: the law of total probability (why can we apply it
here?) gives:
Pr (X = k) =
=
=
Pr (X = k |N = n ) Pr (N = n)
n=0

X
n=k
X
n=k

n
n e
p k (1 p)nk
,
k
n!
n!
n e
p k (1 p)nk
(n k)! k!
n!
continues on next slide.

541/562
since n k.

The Bivariate Case

Now (making change of variables j = n k in the third line):
=
X
n=k
n!
n e
p k (1 p)nk
(n k)! k!
n!
( p)k X nk (1 p)nk
e
k!
(n k)!
k
j=0
( (1 p))j
j!
( p)
( p)k p
e e (1p) =
e
,
k!
k!
which is the p.m.f. of a Poisson( p) P
random variable.
i
* using exponential function exp(x) =
i=0 x /i!, with
x = (1 p).
542/562
( p)
e
k!
n=k

The Bivariate Case

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

The Bivariate Case

Suppose [X , Y ]> has a bivariate normal distribution, then its
density is given by:

1
1
p
fX ,Y (x, y ) =
exp
A ,
2 (1 2 )
2X Y 1 2
where

x X
y Y
x X 2
2
A=
X
X
Y

2
y Y
+
.
Y

543/562

The Bivariate Case
The following results are important although quite tedious to show

(see section 5.10 of W+(7ed) for some of the derivation):

1. The marginals are: X N X , X2 and Y N Y , Y2 .
2. The conditional distributions are:

Y 2
, Y 1 2
(Y |X = x ) N Y + (x X )
X
and

X 2
2
, 1
.
(X |Y = y ) N X + (y Y )
Y X
3. The correlation coefficient between X and Y is: (X , Y ) = .
544/562

The Bivariate Case
Simulating multivariate normal distribution

Bivariate case: use properties 1 & 2 to simulate from i.i.d.
standard normal distributions:
X =X + X Z1
q
Y =Y + Y Z1 + Y (1 2 )Z2 ,
where Z1 and Z2 are i.i.d N(0, 1).
OPTIONAL: In case of multivariate normal, let
Z = [Z1 . . . Zn ]> i.i.d. N(0, 1), we have:
- The Cholesky decomposition: AA> = ( is the
variance-covariance matrix).
- We have: X = + AZ .
545/562

Laws

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

Laws

Note: E[X |Y = y ] is a constant, but E[X |Y ] is a random
variable.
For any two random variables X and Y , we have the law of
iterated expectations:
E [E [Y |X ]] = E [Y ] .
To prove this in the continuous case, first consider:
Z
E [E [Y |X ]] =
E [Y |X = x ] fX (x) dx

Z Z
=
y fY |X (y |x ) dy fX (x) dx.
546/562

Laws
Interchanging order of integration, we have

Z Z
E [E [Y |X ]] =
y
fY |X (y |x ) fX (x) dx dy
{z
}
|
=fY (y )
y fY (y ) dy
=E [Y ]
* using the law of total probability (why can we use it here?).
547/562

Laws

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

Laws

Another important result is the conditional variance identity:
Var (Y ) = Var (E [Y |X ]) + E [Var (Y |X )] .
Proof (* using the law of iterative expectations):

Var (Y ) =E Y 2 (E [Y ])2

=E E Y 2 |X (E [E [Y |X ]])2
h
i

=E E Y 2 |X E (E [Y |X ])2
h
i
+ E (E [Y |X ])2 (E [E [Y |X ]])2
=E [Var (Y |X )] + Var (E [Y |X ]).
Proof can also be found in section 5.11 of W+(7ed).
548/562

Laws

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

Laws
Application: Random Sums

An insurance company usually has uncertainty in both the
number of claims and the claim amount of each claim filled.
Denote the total claim size is S, individual claim size Xi and
N is the total number of claims.
We are interested in the (distribution) mean and variance of a
random sum defined as:
S = X1 + X2 + . . . + XN ,
where both the Xi s and N are random variables.
We assume all the Xi are independent and also independent of
N.
549/562

Laws

Mean of S: The mean of the aggregate claims is:
E [S] = E [Xi ] E [N] .
This is straightforward:
E [S] =E [E [S |N ]]
" " N
##
X
=E E
Xi |N
i=1
"
=E
N
X
#
E [Xi |N]
i=1
=E [N E [Xi |N]]
=E [E [Xi ]] E [N] = E [Xi ] E [N] .

550/562
* using independence Xi and N.

Laws

Variance of S: The variance of the aggregate claims is:
Var (S) = (E [Xi ])2 Var (N) + E [N] Var (Xi ) .
This is also straightforward to show:
Var (S) =E [Var (S |N )] + Var (E [S |N ])

"
!#
N
X
Xi
+ Var (E [Xi ] N)
=E Var
i=1
=E [N] E Var (Xi ) + E [Xi ] Var (N)

| {z }
| {z }
constant
constant
2
=E [N] Var (Xi ) + (E [Xi ]) Var (N)
551/562
* using conditional variance identity, ** using independence

between Xi and N.

Laws

Moment Generating Function of S: The m.g.f. of the
aggregate claims is given by:
MS (t) = MN (log (MX (t))) .
Finding the m.g.f. is also straightforward:
h i
h h ii

MS (t) =E e tS = E E e tS N
i
h
i
h
=E (MX (t))N = E e Nlog(MX (t))
=MN (log (MX (t))) .
Note that when the number of claims has a Poisson
distribution, the resulting total claims S is said to have a
Compound Poisson distribution.
552/562

Laws
Exercise
Let X Gamma(, ) and Y |X EXP(1/X ).
a. Question: Find E [Y ].
(Note: E [X ] = /, EXP()=Gamma(1,))
b. Question: Find Var (Y ). (Note: Var (X ) = / 2 )
a. Solution:
E [Y ] =E [E [Y |X ]]
=E [X ] = /.
b. Solution:
Var (Y ) =Var (E [Y |X ]) + E [Var (Y |X )]

=Var (X ) + E X 2
=/ 2 + Var (X ) + (E [X ])2
553/562

=/ 2 + / 2 + (/)2 = 2 + 2 / 2 .

Introduction

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

Introduction

Let X = [X1 , X2 , . . . , Xn ]> be a random vector with n
elements. The joint distribution function (DF) of X is
denoted by:
FX1 ,X2 ,...,Xn (x1 , . . . , xn ) = Pr (X1 x1 , . . . , Xn xn ) .
In the discrete case, we define the joint probability mass
function as:
pX1 ,X2 ,...,Xn (x1 , . . . , xn ) = Pr (X1 = x1 , . . . , Xn = xn ) .
In the continuous case, we define the joint density function of
X as:
fX1 ,X2 ,...,Xn (x1 , . . . , xn ) =
554/562
...
FX ,X ,...,Xn (x1 , . . . , xn ) .
x1
xn 1 2

Introduction
The joint DF is given by:

Z xn
Z
FX1 ,X2 ,...,Xn (x1 , . . . , xn ) =
...
x1
fX1 ,X2 ,...,Xn (z1 , . . . , zn ) dz1 . . . dzn .
To derive marginal p.m.f.s or densities, simply evaluate (sum

or integrate) overall the region except for the variable of
interest. For example in the continuous case, the marginal
density of Xk , for k = 1, 2, . . . , n is given by:
Z
Z
Y
fXk (xk ) =
...
fX1 ,X2 ,...,Xn (z1 , . . . , xk,. . . . , zn )
dzj .
555/562
j6=k

Introduction
Independent Random Variables

The random variables X1 , X2 , . . . , Xn are said to be
independent if their joint distribution function can be written
as the product of their marginal distribution functions:
FX1 ,X2 ,...,Xn (x1 , . . . , xn ) = FX1 (x1 ) . . . FXn (xn ) .
As a consequence, their joint density can also be written as:
fX1 ,X2 ,...,Xn (x1 , . . . , xn ) = fX1 (x1 ) . . . fXn (xn ) ,
in the continuous case and for the discrete case as:
pX1 ,X2 ,...,Xn (x1 , . . . , xn ) = pX1 (x1 ) . . . pXn (xn ) .
556/562

Introduction
Also, we have (if independent):

E [X1 X2 . . . Xn ] = E [X1 ] E [X2 ] . . . E [Xn ] ,
and in general, (if independent) we have:
E [gX1 (X1 ) gX2 (X2 ) . . . gXn (Xn )] =E [gX1 (X1 )] E [gX2 (X2 )]
. . . E [gn (Xn )] .
557/562

Introduction
If X1 and X2 are independent, then:

1. Cov [X1 , X2 ] = 0 and so (X1 , X2 ) = 0.
2. E [X1 |X2 ] = E [X1 ] and of course E [X2 |X1 ] = E [X2 ].
3. A very useful result about independence is that X1 , X2 , . . . , Xn
are independent if and only if we can write the joint
distribution as a product of functions that involve only each
random variable:
FX1 ,X2 ,...,Xn (x1 , . . . , xn ) = HX1 (x1 ) . . . HXn (xn )
for some functions HX1 , . . . , HXn .
558/562

Summarizing data
Exercises

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

Summarizing data
Exercises
Exercise: summarizing data

An insurer assumes that the time between claims is
exponential distributed. A reinsurer pays out when the insurer
has two or more claims within two years. The distribution of
interest is Gamma(2,3).
Questions: Find the

a.
b.
c.
d.
Median;
Range;
10% trimmed mean;
Inter quantile range.
559/562
Sorted observations:
1.56 1.88 2.53 3.39
3.62 3.68 5.24 5.25
5.31 5.56 5.66 6.17
Solutions:
a.
b.
c.
d.
M = (3.68 + 5.24)/2 = 4.46;

R = 6.17 1.56 = 4.61;
x +...+x
e
x0.10 = (2) 10 (11) = 4.212;
Q1 = 2.53 + 0.75 (3.39 2.53) = 3.18
Q3 = 0.75 5.31 + 0.25 5.56 = 5.37
IQR = 5.37 3.18 = 2.19.

Summarizing data
Exercises
E.c.d.f.
1
0.9
0.8
0.7
F (x)
0.6
0.5
0.4
0.3
Colored lines: E.c.d.f.

Black solid line: Gamma(2,3) c.d.f.
Black dashed lines: Gamma(2,3) c.d.f. 2
0.2
0.1
0
0
560/562
10
15
Question: Is the Gamma(2,3) the correct distribution?

Solution: Yes.
20
25

Summary
Summary

The Bivariate Case
Introduction
Exercises
Laws
Introduction
Summarizing data
Exercises
Summary
Summary

Summary
Summary
Summary joint probabilities

Joint distribution function:
FX1 ,X2 (x1 , x2 ) = Pr (X1 x1 , X2 x2 ) .
Marginal p.m.f.:
pX1 (x1i ) =
pX1 ,X2 (x1i , x2j ) .
j=1
Marginal density function:

Z
fX1 (x1 ) =
fX1 ,X2 (x1 , z2 ) dz2 .
Conditional probability:
Pr (X = xi |Y = yj ) =
561/562
Pr (X = xi , Y = yj )
.
Pr (Y = yj )

Summary
Summary
Summary joint probabilities

Covariance:
Cov (X1 , X2 ) 12 = E [X1 X2 ] E [X1 ] E [X2 ] .
Correlation:
(X1 , X2 ) = p
Cov (X1 , X2 )
Var (X1 ) Var (X2 )
Law of iterative expectations:

E [E [Y |X ]] = E [Y ] .
Conditional variance identity:
Var (Y ) = Var (E [Y |X ]) + E [Var (Y |X )] .
562/562

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ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

ACTL2002/ACTL5101 Probability and Statistics

Week 3 Video Lecture Notes

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Special sampling distributions & sample mean and variance

Numerical methods to summarize data

Graphical procedures to summarize data

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Question: For the following four cases would we refer to a

All the actuaries in Australia;

Solution: 1. Population; 2. Sample; 3. Population 4. Sample.

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Summarising data: Numerical approaches

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Special sampling distributions & sample mean and variance

Numerical methods to summarize data

Graphical procedures to summarize data

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

The population mean is given by:

100% trimmed mean, the average of the observations after

where bnc is the greatest integer less than or equal to n.

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

The population variance:

Population standard deviation: = 2 .

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Solution: They are -1.96, -1, 0, 1 and 1.96, respectively.

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Mode: The mode m is the value that maximises the p.m.f.

Median absolute deviation:

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Special sampling distributions & sample mean and variance

Numerical methods to summarize data

Graphical procedures to summarize data

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

xi2 = 36 904 873.

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

First step: arrange in ascending order:

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

447 762.6 = 669.2.

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Determine P0.35 , i.e., the 35th percentile (0.35 quantile)

= 605 + 0.75 (147) = 715.25

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Determine the 10% trimmed mean:

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Special sampling distributions & sample mean and variance

Numerical methods to summarize data

Graphical procedures to summarize data

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Empirical cumulative distribution function (ecdf)

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Each row corresponds to a bin.

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Boxplot (Box-and-Whiskers plot)

Red line: median; Blue box: Q1 and Q3 (height of box: IQR)

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Q-Q plot calculations

ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes

Q-Q plot (quantile-quantile plot)

Standard normal quantiles

Q-Q plot displays if a distribution is a correct approximation and/or when