THE UNIVERSITY OF NEW SOUTH WALES MONTH OF EXAMINATION - JUNE 2006 Final Examination ACTL2002/ACTL5101 PROBABILITY AND STATISTICS

FOR ACTUARIES

Sample Solutions and Marking Guide

SECTION I [55 MARKS] Question 1 [10 marks] a) [2 marks] Let X be the number of aces in a tennis match then e k Pr (X = k) = k! and we are given Pr (X = 0) = e = 0.049787 so that = 3. The required probability is Pr (X 3) =
X e k k=3 2 X e k = 1 = 10.42319 = 0.5768 (from Poisson tables) k! k=0

k!

b) [3 marks] The number of matches in which he will serve at least 3 aces is a binomial random variable with n = 10 and p = 0.5768. Required probability is p=
10 X 10 k=6

(0.5768) (1 0.5768)

10k

=1

5 X 10 k=0

(0.5768)k (1 0.5768)10k

From Binomial tables in Formula and Tables we have 5 X 10 1 (0.6)k (0.4)10k = 1 0.3669 = 0.6331 k k=0 and 1
5 X 10 k=0

(0.5)k (0.5)10k = 1 0.0.6230 = 0.377

and linear approximation gives p = 0.574. c) [5 marks] Expected donation for Amex 100, 000 [0 Pr (0) + 1 Pr (1) + 2 Pr (1) + 3 Pr ( 3)] e3 32 e3 32 3 3 3 = 100, 000 e 3 + 2 +3 1e e 3 2 2 3 2 e 3 = 100, 000 3 3e3 2e3 3 2 3 = 100, 000 3 e (13.5) = 232, 787.46

Expected donation for Lacoste C [1 Pr (3) + 2 Pr (4) + . . .] 3 3 e3 34 e3 35 e 3 +2 +3 ... C 3! 4! 5! 3 3 3 3 e3 34 e3 35 e 3 e3 34 e3 35 e 3 +4 +5 ... 2 + + ... C 3 3! 4! 5! 3! 4! 5! e3 32 e3 32 3 3 3 2 1e e 3 C 3 e 3+2 2 2 3 C 1 + 5e = C 1.248935

= = = =

Hence C = 186, 388.71

Question 2 [5 marks] a) [3 marks] Suppose X1 , X2 , ..., Xn are independent, identically distributed random variables with nite mean and nite variance 2 . The Central Limit Theorem expressed in terms of the standardised sums Sn = states that the random variable Sn n d N (0, 1) as n . n b) [2 marks] Require Pr " 100 X
i=1 n X k=1

Xk .

Xi > 400

where Xi Gamma with mean 4 and variance 4. Applying CLT we approximate required probability by " # P100 Xi 100 4 400 100 4 Pr Z = i=1 > =0 10 2 10 2 where Z N (0, 1) . Answer is 0.5. No need for continuity correction since we are approximating a continuous distribution.

Question 3 [5 marks] a) [3 marks] First note that the mgfs are in the form of the Normal distribution mgf where 1 2 2 M (t) = et+ 2 t 2 2 1 Thus X N (2, 2) and Y N (1, 6) . Therefore W = (X2) + Y6 is the sum of 2 2 squared standard normal random variables and has a Chi-squared distribution with 2 degrees of freedom. The mgf of the Chi-squared distribution with 2 degrees of freedom is M (t) = (1 2t)1 b) [2 marks] For a chi-squared random variable with 2 degrees of freedom 1 E (W ) = 1 = 2
2

and

1 var (W ) = 2 = 4 1
2

Question 4 [7 marks] a) [4 marks] Pr (X + Y 1) = Pr (Y 1 X) . Z 1 Z 1x 6 2 x + 2xy + y 2 dydx Pr (X + Y 1) = 7 0 0 1x Z 1 y3 6 2 2 x y + xy + dx = 7 0 3 0 !# Z " 6 1 (1 x)3 = x2 (1 x) + x (1 x)2 + dx 7 0 3 !# Z " (1 x)3 6 1 x2 + x + dx = 7 0 3 " !#1 4 3 2 x x (1 x) 6 + = 7 3 2 12 0 1 1 1 6 (4 + 6 + 1) 3 6 + + = = = 7 3 2 12 7 12 14 b) [2 marks] Marginal density of Y. fY (y) = 6 (x + y)2 dx 0 7 1 6 x3 2 2 + x y + xy = 7 3 0 6 1 + y + y2 = 7 3 4 Z
1

c) [1 mark] Conditional density of X|Y. fX|Y (x|y) = f (x, y) fY (y) 6 (x + y)2 = 6 71 + y + y2 7 3 (x + y)2 + y + y2 3

= 1 Question 5 [8 marks] a) [4 marks] Joint density f (x, y) is f (x, y) = c where c so c =

2 . 3

0 y x, y 1, x 2
1

Diagram can be used to check that area of the density is 3 . 2 ( R1

2 0 Rx 2 x 3

Z 1 Z
0

dx +

dx dy = 1

b) [4 marks] Marginal densities for fX (x) = = and fY (y) = 2 dx 0 y x, y 1 y 3 4 2 y = 3 3 Z

2 dy 3 2 dy 0 3 2 1< 3

x2 0x1

1<x2 0x1

Question 6 [10 marks] a) [3 marks] Probability mass function of X is Pr (X = k) = 1 e(k+1) 1 ek = e(k+1) + ek = ek 1 e = pk (1 p)

where p = e so this is a geometric random variable. 5

b) [7 marks] Density of Z =

X Y

FZ (z) = = = = For the density we have

X z Pr (Z z) = Pr Y Pr (X zY ) Z Z zy f (x, y) dxdy 0 0 Z Z z yf (vy, y) dvdy where x = vy

0 0

fZ (z) = =

FZ (z) z Z
0

yf (zy, y) dy

Now, since X and Y are independent and exponential f (x, y) = f (x) f (y) = ex ey = 2 e(x+y) we then have fZ (z) = = Z

y2 e(zy+y) dy

y2 ey(z+1) dy 0 Z 1 d 2 y(z+1) dy e y = dy (z + 1) 0 Z 1 1 2 y(z+1) y(z+1) = y + dy e e (z + 1) (z + 1) 0 2 1 = 2 = 2 (z + 1) (z + 1)2 Question 7 [10 marks] a) [2 marks] Likelihood function L(p) L(p) = pX1 (1 p)1X1 . . . pXn (1 p)1Xn = p
n i=1

Z0

Xi

(1 p)n

n i=1

Xi

p, the maximum likelihood estimator (MLE) of p b

i=1

l (p) = ln L(p) ! n n X X = Xi ln p + n Xi ln (1 p)
i=1

 l (p) = p or

P n n Xi i=1 =0 p 1p ! n n X X (1 p) b Xi p n b Xi = 0
i=1

Pn

Xi

i=1

b) [3 marks] Variance of the MLE

p= b

Pn

i=1

i=1

Xi

n Pn

var (b) = var p

i=1

Xi

n np (1 p) = n2 p (1 p) = n

Cramer-Rao lower bound 2 1 where I (p) = E ln f (X|p) nI (p) p f (X|p) = pXi (1 p)1Xi ln f (X|p) = Xi ln p + (1 Xi ) ln (1 p) Xi (1 Xi ) ln f (X|p) = p p 1p

2 2 Xi (1 Xi ) ln f (X|p) = E E p p 1p # " Xi2 Xi (1 Xi ) (1 Xi )2 = E 2 + p2 p 1p (1 p)2 p 1p = 2 0+ p (1 p)2 1 1 1 + = = p 1 p p (1 p) p (1 p) 1 = nI (p) n Hence attains the Cramer-Rao lower bound. c) [2 marks] Approximate 95% condence interval for p. pp b Pr Z (0.025) q Z (0.025) + 0.95
p(1p) n

So 95% condence interval

Pr p 1.96 b

! r p (1 p) b b p (1 p) b b p p + 1.96 b + 0.95 n n p 1.96 b p1 = b r p (1 p) b b n

d) [3 marks]

CIs

s 1 1 1 1 4 1.96 4 4 20 (0.0602, 0.4398) 33 33 1 100 33 100 1.96 100 100 (0.2378, 0.4222) Larger sample size gives smaller condence interval. Neither reject H0 : p = 0.4. s

p2 b

5 1 = 20 4 33 = 100

SECTION II [45 MARKS] Question 8 [16 marks] a) [2 marks] Method of moments estimator of . E [X] = X= Therefore Pn
i=1

2 Xi

b) [3 marks] Mean and variance of the method of moments estimator of . h i E e = E 2X Pn i=1 Xi = 2E n 2 n = n 2 = h i var e = var 2X # " n X 4 = 2 var Xi n i=1 = 4 2 n n2 12 2 = 3n

e = 2X

c) [2 marks] Maximum likelihood estimator of . f (x|) = Likelihood is 1 0<x<

We seek the smallest value possible for to maximise the likelihood. Since all sample values must be less the minimum value that can take is the maximum of the X1 , X2 , . . . , Xn values to maximise the likelihood. Hence b = max (x1 , x2 , . . . , xn ) 9

n 1 > X1 , X2 , . . . , Xn L () =

d) [3 marks] Probability density of the maximum likelihood estimator of . F (x) = Pr (X1 x) Pr (X2 x) . . . Pr (Xn x) = F (x)n where F (x) = Z
x

x = Therefore F (x) = and the density is f (x) = n

1 dy

e) [5 marks] Mean and variance of the maximum likelihood estimator of . Z h i 1 x n1 b = xn dx E 0 Z n n = n x dx 0 n xn+1 = n n+1 0 n = n+1 Z n1 h 2i 2 1 x b = xn dx E 0 Z n n+1 = n x dx 0 n xn+2 = n n+2 0 n 2 = n+2 so h i var b = 2 n 2 n n+2 n+1 n 2 = 2 (n + 1) (n + 1)

1 x n1

x n

f) [1 marks] Modication of the maximum likelihood estimator of that is unbiased. n + 1b n

10

Question 9 [14 marks] a) [2 marks] Null hypothesis is H0 : A = B = C = D . Test statistic is F = where from the table SSB = 188.6785, I = 4 SSW = 912, J = 7, I (J 1) = 24 Under the Null hypothesis and the assumption that the errors are normally distributed the test statistic has an F3,24 distribution. The 5% critical value is 3.009. We do not reject the null hypothesis. Hence this data is not evidence of signicant dierences between the population means of the four insurance companies at a 95% condence level. b) [4 marks] Null hypothesis is H0 : 2 = 2 and alternative is H1 : 2 6= 2 . We have C D C D (n 1) S 2 2 n1 2 S2 = and 2 1 X Xi X n1 1
n

SSB / (I 1) = 1.655 SSW /I (J 1)

Under H0

2 2 m 1 S1 2 2 n1 2 Fn1,m1 2 2 1 S2 n 1 m1

2 2 S1 2 S1 2 = 2 2 2 S2 S2 1 97.619 = 17.8095 = 5.481 0.025 Critical values are F6,6 = hypothesis at the 5% level. 1 0.975 F6,6

1 5.82

0.975 = 0.172 and F6,6 = 5.82. Cannot reject null

c) [4 marks] 95% condence interval for the standard deviation for Company D. (n 1) S 2 2 n1 2

(n 1) S 2 2 2 Pr 6 (0.025) 6 (0.975) = 0.95 2 s s ! (n 1) S 2 (n 1) S 2 Pr = 0.95 2 (0.025) 2 (0.975) 6 6 11

For company D we have S 2 = 17.8095, n = 6 and we have 2 (0.025) = 1.237, 6 2 (0.975) = 14.45 so that the 95% CI for D is 6 (2.719, 9.294) d) [4 marks] Null hypothesis is H0 : C = D and H1 : C 6= D . Can not reject equal variance hypothesis so we use the test statistic X C X D (C D ) q t= 1 1 sp n + m which under the Null hypothesis is t with n + m 2 degrees of freedom and s2 = p
2 2 (n 1) SC + (m 1) SD m+n2 6 97.61904 + 6 17.8095 = 10 = 57.71429

and t = = 30.4286 31.14286 q 57.71429 1 + 1 7 7

0.71426 4.06076 = 0.1759

97.5 Two tailed critical value is t10 =2.228. Can not reject the null. Consistent with a).

Question 10 [15 marks] a) [5 marks] b 1 = X n P P P xi yi ( i xi ) ( i yi ) P P n i x2 ( i xi )2 i

i

Sxy = Sxx Syy

(60) (1795) xy nxy = 11570 12 = 2595 12 12 2 X 60 = x2 nx2 = 402 12 = 102 12 2 X 1795 2 2 = y ny = 343725 12 = 75222.917 12 12

b b 0 = y 1x

Regression equation is

Sxy 2595 b = 25.44 1 = = Sxx 102 60 1795 b b 25.44( ) = 22.38 0 = y 1x = 12 12 b b Y = 0 + 1 X + ei = 22.38 + 25.44X + ei

Goodness of t can be checked using R2 X T SS = y 2 ny 2 = Syy = 75222.917 (Sxy )2 (2595)2 = 66020.0 = Sxx 102 ESS = T SS RSS = 9202.917 RSS = s2 = 9202.917 = 920.2917 10

R2 = (0.93683)2 = 0.87765

Sxy 2595 r = p = 0.93683 =p Sxx Syy (102) (75222.917)

Thus this appears to give a good t to the data. Need to also check model assumptions and do plots of tted line and data to test t. b) b i) [6 marks] Variance of Y0 is given by " # (x0 x)2 1 b V ar Y0 = 2 + Pn 2 n i=1 (xi x)

13

No need to include ei since we are determining a particular value given the regression equation. Need to allow for the uncertainty in the parameters. (ii) [4 marks] We know that Z q tn
U n

b b b V ar Y0 = V ar 0 + 1 x0 b0 + x2 V ar 1 + 2x0 Cov 0 , 1 b b b = V ar 0 Pn 2 2 xi = Pn 2 i=1 n P 2 n i=1 xi ( i=1 xi ) n 2 +x2 Pn 2 P 0 2 n i=1 xi ( n xi ) Pn i=1 2 xi +2x0 Pn 2 i=1 n P 2 n x ( xi ) Pn i=1 i 2 2 i=1 2 Pn 2 i=1 x2 + x0 n 2x0 i i=1 xi = Pn 2 n (xi x) Pn 2 i=1 Pn 2 [ i=1 xi 2x0 i=1 xi + x2 n] 0 = P n n (xi x)2 Pn 2 i=1 2 P 2 [ i=1 xi nx + nx2 2x0 n xi + x2 n] 0 i=1 = Pn 2 n i=1 (xi x) Pn (xi x)2 + n (x2 2x0 x + x2 ) 2 0 i=1 = P n n (xi x)2 i=1 Pn 2 2 2 i=1 (xi x) + n (x0 x) = P n n (xi x)2 i=1 " # (x0 x)2 2 1 = + Pn 2 n i=1 (xi x)

where Z N (0, 1), U 2 and Z and U are independent. Now assuming Normal n errors b0 ( 0 + 1 x0 ) Y rh i N (0, 1) (x0 x)2 1 + n (x x)2 n
i=1 i

and

nb2 2 n2 2 i2 1 Xh b0 + 1 xi b yi = b n 2 i=1
n 2

where

14

and these are independent. Hence s b n2 Y0 ( 0 + 1 x0 ) 2 r tn2 h i n2 (x0 x)2 1 + n (x x)2 n

i=1 i

or

has a t distribution with n 2 degrees of freedom.

b0 ( 0 + 1 x0 ) Y n2 r t= 2 1 + n(x0 x) 2 b n (x x)
i=1 i

- End of Final Examination Solutions -

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