E370

Week 05
Part 2:
Practice Expected Values of
Discrete Random Variables
 An automobile insurance company estimates the following
loss probabilities for the next year on a $10,000 motorcycle.
What is the expected loss, the expected standard deviation
of loss, and the value of the median loss?

Loss
% Loss P(Loss) (Xi)*P(Xi) (XiiE(X))22 *P(Xii)
Value
(10000-285)
(10000-285)22*0.001
*0.001
Total loss 10000 0.001 10 =94381.23
=94381.23
50% loss 5000 0.010 50 222312.3
222312.3
25% loss 2500 0.050 125 245311.3
245311.3
10% loss 1000 0.100 100 51122.5
51122.5
0% loss 0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40

Practice expected values

 An automobile insurance company estimates the following
loss probabilities for the next year on a $10,000 motorcycle.
What is the expected loss, the expected standard deviation
of loss, and the value of the median loss?

Loss
% Loss P(Loss) (Xi)*P(Xi) (XiiE(X))22 *P(Xii)
Value
(10000-285)
(10000-285)22*0.001
*0.001
Total loss 10000 0.001 10 =94381.23
=94381.23
50% loss 5000 0.010 50 222312.3
222312.3
25% loss 2500 0.050 125 245311.3
245311.3
10% loss 1000 0.100 100 51122.5
51122.5
0% loss 0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40

Practice expected values

 An automobile insurance company estimates the following
loss probabilities for the next year on a $10,000 motorcycle.
What is the expected loss, the expected standard deviation
of loss, and the value of the median loss?

Loss
% Loss P(Loss) (Xi)*P(Xi) (XiiE(X))22 *P(Xii)
Value
(10000-285)
(10000-285)22*0.001
*0.001
Total loss 10000 0.001 10 =94381.23
=94381.23
50% loss 5000 0.010 50 222312.3
222312.3
25% loss 2500 0.050 125 245311.3
245311.3
10% loss 1000 0.100 100 51122.5
51122.5
0% loss 0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40

Practice expected values

 An automobile insurance company estimates the following
loss probabilities for the next year on a $10,000 motorcycle.
What is the expected loss, the expected standard deviation
of loss, and the value of the median loss?

Loss
% Loss P(Loss) (Xi)*P(Xi) (XiiE(X))22 *P(Xii)
Value
(10000-285)
(10000-285)22*0.001
*0.001
Total loss 10000 0.001 10 =94381.23
=94381.23
50% loss 5000 0.010 50 222312.3
222312.3
25% loss 2500 0.050 125 245311.3
245311.3
10% loss 1000 0.100 100 51122.5
51122.5
0% loss 0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40

Practice expected values

 An automobile insurance company estimates the following
loss probabilities for the next year on a $10,000 motorcycle.
What is the expected loss, the expected standard deviation
of loss, and the value of the median loss?

Loss
% Loss P(Loss) (Xi)*P(Xi) (XiiE(X))22 *P(Xii)
Value
(10000-285)
(10000-285)22*0.001
*0.001
Total loss 10000 0.001 10 =94381.23
=94381.23
50% loss 5000 0.010 50 222312.3
222312.3
25% loss 2500 0.050 125 245311.3
245311.3
10% loss 1000 0.100 100 51122.5
51122.5
0% loss 0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)
V(X) =
= 681275
681275 $825.40

Practice expected values

 An automobile insurance company estimates the following
loss probabilities for the next year on a $10,000 motorcycle.
What is the expected loss, the expected standard deviation
of loss, and the value of the median loss?

Loss
% Loss P(Loss) (Xi)*P(Xi) (XiiE(X))22 *P(Xii)
Value
(10000-285)
(10000-285)22*0.001
*0.001
Total loss 10000 0.001 10 =94381.23
=94381.23
50% loss 5000 0.010 50 222312.3
222312.3
25% loss 2500 0.050 125 245311.3
245311.3
10% loss 1000 0.100 100 51122.5
51122.5
0% loss 0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)V(X)
= 681275.11
= 681275 $825.40

Practice expected values

 An automobile insurance company estimates the following
loss probabilities for the next year on a $10,000 motorcycle.
What is the expected loss, the expected standard deviation
of loss, and the value of the median loss?

Loss
% Loss P(Loss) (Xi)*P(Xi) (XiiE(X))22 *P(Xii)
Value
(10000-285)
(10000-285)22*0.001
*0.001
Total loss 10000 0.001 10 =94381.23
=94381.23
50% loss 5000 0.010 50 222312.3
222312.3
25% loss 2500 0.050 125 245311.3
245311.3
10% loss 1000 0.100 100 51122.5
51122.5
0% loss 0 0.839 0 68147.78
68147.78 SQRT
E(X) $285 V(X)V(X)
= 681275.11
= 681275 $825.40

Practice expected values

What does the loss function look like?

Continuing the problem

1. Recognize a valid probability (frequency) distribution.
2. Recognize that the answer is a dollar value, and
translate % loss to dollars.
3. Sketch a frequency polygon (or histogram) correctly.
4. Calculate expected value.
5. Calculate expected standard deviation.
6. Definition of a median.
7. Correctly interpret graph.
8. Correctly interpret statistics.

What concepts were

necessary for this problem?