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Lesson 1: Probability Review

1.1 Functions and Moments
- (Cumulative) distribution function- probability X is less than or equal to x;
() ( ) defines X, right continuous

( ) ()
- discrete- points where non-zero are isolated
- continuous- differentiable at countable number of points
- mixed- continuous except at countable number of points
- S(x) is the survival function, compliment of F(x); probability that X is strictly
greater than x, P(X>x); X is survival time, probability of living longer than x
- ()

() is the probability density function

- () ( ) is probability mass function for discrete random variables
- ()
()
()()

() is the hazard function- the conditional

density function (density function for X greater than x (survival to time x))
- ()
()

- density function used to calculate moments to measure centre and dispersion
- expected value (mean) of x for continuous functions- [] ()

;
expected value of function- [()] ()()

- expected value (mean) of x for discrete functions- [] ()

;
expected value of function- [()] ()()

;
- n
th
raw moment- n = E[X
n
]; =1 is mean
- n
th
central moment (n1)- n = E[(X-)
n
]; n is typically positive, but doesnt
need to be
- expectation is linear so central moments can be calculated from raw
moments; the last two terms merge (expand binomial)

- variance- V[X] = Var(X) = o
2
= 2 = E[X
2
]-( E[X])
2

- standard deviation- square root of variance, o
- coefficient of variation- o/
- covariance- measures the strength of interdependence between variables
- or
and Cov(X,Y) = 0 if X and Y are
independent
- correlation coefficient-
2
- p
th
percentile- a number tp such that
- if F is continuous and strictly increasing then F(tp) = p is a unique point
- median- 50
th
percentile
- mode- x such that f(x) is maximized (take derivative or find most common
value)

1.2 Probability Distributions
Bernoulli Distribution
- assumes only 0 or 1; 1 with probability q and 0 with probability p
o mean: q; variance: pq = (1-q)q
- Let Y assume two values x1 with probability p and x2 with probability q; Y=
x1+(x2-x1)X where X is Bernoulli
o Mean: x1+(x2-x1)p; variance (x2-x1)
2
q(1-q)
- Variance of Bernoulli-type variable assuming only two values = difference of
two values squared * probability of first value * probability of second value
Binomial Distribution
- Sum of m Bernoulli random variables with same mean q
o Mean: mq; variance: mq(1-q)
Uniform Distribution
- f(x)= 1/(b-a) on [a,b] and 0 elsewhere
o mean: (a+b)/2; variance: (b-a)
2
/12
Exponential Distribution
- ()

; ()

- mean= u; variance= u
2


Gamma Distribution
- Sum of m exponential random variables all with the same mean

o Mean: mu; variance: mu
2

- I(n) = (n-1)! is the gamma function; n doesnt need to be an integer
-

1.3 Variance
- expected value is linear regardless if X and Y are independent:
-

-
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- and if X
and Y are independent, Cov(X,Y) = 0 so

- For n independent random variables
- If n independent random variables have same means

-
- covariance matrix lists variance and covariance between n random variables
X1,,Xn in an n x n matrix that is symmetric and non-negative definite
although covariance could be negative

- sample - set of n independent identically distributed random variables
o mean= ; variance = o
2
/n


1.4 Normal Approximation
- Central Limit Theorem- for distribution with finite variance, the sample mean
approaches normal distribution
- Y with normal distribution (mean= ; variance = o
2
); Z is standard normal
random variable (mean=0, variance=1) where Y=+oZ
- |(x) is cumulative normal distribution function up to the value x

1.5 Conditional Probability and Expectation
- Probability of A given B occurs (P(B) >0) where
P(AB) is probability of both A and B occurring
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- For continuous distributions: where

- Bayes Theorem: discrete and continuous

- Exhaustive- ; Bi partitions entire sample space
- Mutually exclusive- two events cannot coexist
- Law of Total Probability- if Bi is exhaustive and mutually exclusive,
for discrete and
for continuous
- Conditional mean formula- expected value factored out
and in general


1.6 Conditional Variance
- Calculate condition of X on Y then calculate moments of conditional variable
X|Y
-

1.7 Other
- skewness- ; negative = skewed to the left (long tail to
the left); positive = skewed to the right (long tail to the right)
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- kurtosis- greater the value, the more the variance is
due to infrequent extreme deviations rather than frequent modest-sized
deviations

Lesson 2: Survival Distributions: Probability Functions

2.1 Probability Notation
- Tx random variable for time to death for someone aged x
- (x) someone aged x
- FT(t) = P(Txst) is the (cumulative) distribution function
o Ie. is probability (50) doesnt survive 30 years = F50(30)
- Survival function- compliment of the cdf; ST(t) = P(T>t) = 1-FT(t)
o Ie. S50(30) probability (50) survives at least 30 years
o
- Survival function properties:
o SX(0) = 1; cannot have negative survival (X survives 0 years is
guaranteed)
o SX(t) > Sx(u) for u>t; the function is monotonically nonincreasing as
the probability of surviving a longer time is never greater than
probability of surviving a shorter amount of time
o since people must die; Tx is never infinite
o Sx(t) is differentiable for t>0 with only a finite number of exceptions to
help determine the pdf
o so mean survival time exists
o so variance of survival time exists
- probability (x) survives
t+u years is probability (x) survives t years times probability (x+t) survives u
years
-
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- =Pr[T0+tT0>x] =
Pr[x < T0 +t ]/Pr[T0 >x] = [S0(x) - S0(x+t)]/S0(x))

2.2 Actuarial Notation
- Sx(t) = tpx where p denotes probability of survival, x is age, t is duration
- Fx(t) = tqx where q denotes probability of death, x is age, t is duration
- is probability of a
delayed death; probability Tx is between u and u+t
- t omitted if it is equal to 1
-
- survives t years, but does not survive t+u years
-

2.3 Life Tables
- look at survivorship random variable
- x0 = 0 or initial age; the random variable for the number of lives at each age
- radix- number of lives at age x0
- lx number of lives at age x
- is a binomial random variable with parameters l0 and xp0 so expected
value is lx= l0* xp0
-
- dx = expected number of deaths
-
- ndx =

2.4 Mortality Trends
- mortality improving, assume it is for upcoming years
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- assume base mortality table applies to baseline year Y and set mortality rate
for (x) in year Y+s to q(x,s)
- if assume that there is a mortality improvement of a fixed percentage per
year where Rx is compliment of mortality
improvement rate/Reduction Factor/projection factor (does not necessarily
reduce mortality)
- when calculating , multiply appropriate reduction factors for the
attained ages
- if multiple lives, multiply probabilities (do not add)
-

Lesson 3: Survival Distributions: Force of Mortality
-
- force of mortality (x)- hazard rate function; measures rate of mortality at
age x, given survival to age x
-
-
-
-

is
-
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- regardless of x or t although assumed x fixed
and t varies so by default t is normally 0
-
- derivative of ln of a
function is the derivative of the function divided by the function
-
- probability of survival to the age in the
upper bound given they survived to the age in the lower bound after
integrating force of mortality then taking negative exponential of it
-
- the probability of Tx being in a certain range is found by taking integral of f(x)
in range
-
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- to be legitimate , must go to zero as x increases to infinity
- goes to infinity as x goes to infinity (must increase)
- linear transformations of : if one has a force of interest and survival
probability and another has force of interest and survival
probability , their new force of interest (sum of both) an
their survival probability is
- if k = and is constant, then survival probability for combo is
- if one has a force of interest and survival probability , then
someone with a force of interest has survival probability
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-
-

Lesson 4 Survival Distributions: Mortality Laws
- mortality laws- parametric function to define survival function to simplify
calculations
- could also interpolate based on table values

4.1 Mortality laws that may be used for human mortality
- maximum age is 100 in model
- survival function graph: functions related but truncating, shifting and scaling
since each graph is constant multiple of each other (only divide by different
survival probability)
o older the age, shorter line on the graph since less survival compared
to younger age
o tpx, lx+t have similar curve shape as Sx(t)
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- probability density function graph: