Exam P

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General Probability
General Probability GENERAL PROBABILITY

Basic Probability Relationships

Basic Probability Relationships De Morgans Law
De Morgans Law Bayes Theorem
Bayes Theorem
PrPr

= =PrPr + + PrPr
PrPr
PrPr + += =
PrPr++
+ + PrPr
-- Pr
Pr--
+ + PrPr-- = = 3 3
PrPr


= =PrPr + +PrPr + +PrPr PrPr + += =
PrPr++ 2/0 PrPr
2/0 22 Pr Pr22

PrPr
PrPr

Conditional Probability
Conditional Probability Combinatorics
Combinatorics
PrPr
+ +
PrPr

PrPr


PrPr++= =1 1 PrPr PrPr
= = !!==

1 1 2 21 1
PrPr !!
Law of Total Probability
Law of Total Probability
. .2=
2 =
. . Independence
Independence
! !
PrPr = = PrPr
- - PrPr

= =
PrPr Pr
Pr !!
PrPr
= =PrPr . .2=
2 = = =
-/0-/0

! !! !



Univariate Probability Distributions
Univariate Probability Distributions
UNIVARIATE PROBABILITY DISTRIBTIONS

*Probability Mass Function (PMF)

*Probability Mass Function (PMF) *Expected Value
*Expected Value *Moment Generating Function (MGF)
*Moment Generating Function (MGF)
O O _@ _@
= = ;; = = _; _;= =POPO ; ;

;; = =
1 1 O O
= =POPO ; ;
D;`a
D;`a = = a_ a_
;;
=>> @
=>> @
O O
= =R R++ ;;
, for domain
, for domain
0 0 ;;0 0= = 1 1
;; = =
0 (continuous)
0 (continuous) 2 2 ;`b = =
;`b ;; bb (independent)
(independent)

; ; . .
| |

= =
V V

*Cumulative Distribution Function (CDF)
*Cumulative Distribution Function (CDF) PrPr
= =
. . ; ;
. .

;;DD= = PrPr
DD= = D-/0D-/0
;;- -
= =
_/R_/R
PrPr < <

= = ;;
;; 0
J J 0 + + ++ 22 = = 0
0 + + ++ 22 Percentiles
Percentiles
; ; = = ;; (continuous)
(continuous)
The 100
The 100 th percentile is the smallest value of
th percentile is the smallest value of
d d

J@ J@ Variance, Standard Deviation and Coefficient of
Variance, Standard Deviation and Coefficient of

Variation
Variation where
where ;
; d d
.
.


= = Z Z Z Z Univariate Transformation
Univariate Transformation

++ = = ZZ

P0

= = 0 0 b b ; ;P0
= = P0 P0

= =
where
where == ()
() =
= P0P0

= =

Discrete Distributions
Discrete Distributions

PMF
PMF Mean
Mean Variance
Variance MGF
MGF Special Properties
Special Properties
11 +
+


+
+
1 1
11 Z Z D_ D_
a`0
a`0_ _
Discrete Uniform
Discrete Uniform


+
+
11 22 1212 (1(1
_ )(
_ )(
+
+
1)1)
@ @
Binomial
Binomial 1
1 .P@.P@
1
1 _ _

++ . .



Hypergeometric
Hypergeometric


Geometric
Geometric 11 _ _

1
1 @P0@P0

11 1
1 1 1 _ _
Memoryless property
Memoryless property
::
trials;
trials;
::
failure
failure 11 ZZ

== +
+1 1 1
1 w w 1 1
1
1 1 1 _ _
x x


11x x _ _

Negative Binomial
Negative Binomial 1
1 @Px@Px



11 11 1
1 1 1
_ _
NegBin
NegBin =
=
1, 1,
~ ~
Z Z
::
trials;
trials;
::
failure
failure +
+


11x x x x Geometric()
Geometric()

== +
+
1
1 w w


11 1
1 1 1 _
_

P{
P{
@@ ~ ~ Sum of independent Poissons ~
Sum of independent Poissons ~
Poisson
Poisson {}{ P0
} P0

!! Poisson( = = .-/0.-/0
Poisson( - ) - )
Continuous Distributions
Continuous Distributions
PDF
PDF CDF
CDF Mean
Mean Variance
Variance MGF
MGF Special Properties
Special Properties

Continuous
Continuous 11

+
+
Z Z
a_ a_
D_ D_

>> ~ uniform(,
~ uniform(,
) )

Uniform
Uniform



22 1212



>> ~ uniform(0,
~ uniform(0,
) )

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 PDF
PDF
PDF CDF
CDF
CDF Mean
Mean
Mean Variance
Variance
Variance MGF
MGF
MGF Special Properties
Special Properties
Special Properties
1 1P1@P @P @ @ @ @ 11 1 Memoryless property:
Memoryless property:
Memoryless property:
Exponential
Exponential
Exponential 1 1
1 P
P P Z Z Z
11
1




>
> >
~
~
~
P0
P0
P0

P0
P0
P0 P @P @P @ 11
1 PrPrPr=
= =
, , , 1 1 1 Sum of independent exponentials
Sum of independent exponentials
Sum of independent exponentials ~
~ ~
Z Z Z
Gamma
Gamma
Gamma




2/R
2/R
2/R
@ @ @ 11
1
Gamma
Gamma ,,
Gamma ,

~ Poisson
~ Poisson ==
~ Poisson =



Symmetry:
Symmetry:
Symmetry:
=
==
_ _ _
Normal
Normal
Normal Z Z Z _`
_`
_`
Z Z Z PrPrPr

==Pr=
PrPr



PrPrPr

=== PrPrPr


==Pr=PrPr



Central Limit Theorem
Central Limit Theorem
Central Limit Theorem Sum of Independent Normal Random Variables
Sum of Independent Normal Random Variables
Sum of Independent Normal Random Variables Expectation and Variance for Sum and Average
Expectation and Variance for Sum and Average
Expectation and Variance for Sum and Average
Sum of identically and independently distributed
Sum of identically and independently distributed
Sum of identically and independently distributed ~ Normal
~ Normal
~ Normal
=
==
/ /
/ ,
, ,== =/

/
/ of IID Random Variables
of IID Random Variables
of IID Random Variables
(IID) random variables approximately follows a
(IID) random variables approximately follows a
(IID) random variables approximately follows a == 0=
+0+
+
0 + +.+
. .


===0+ 0+ +
0 + + ..
.+

normal distribution
normal distribution
normal distribution
== =

[]
[]
[]

===



== =







==(1/)
=
(1/)
(1/)







MULTIVARIATE PROBABILITY DISTRIBUTIONS
MULTIVARIATE PROBABILITY DISTRIBUTIONS
MULTIVARIATE PROBABILITY DISTRIBUTIONS
MULTIVARIATE PROBABILITY DISTRIBTIONS

*Joint PMF and CDF

*Joint PMF and CDF
*Joint PMF and CDF Double Expectation and
Double Expectation and
Double Expectation and Multinomial Distribution
Multinomial Distribution
Multinomial Distribution
=>> @
=>> @
=>> @
=>> w
=>> w ;,b
=>> w
;,b ,
;,b,
,
==1 =
1 1 Law of Total Variance
Law of Total Variance
Law of Total Variance PrPrPr 0=
0= 00= , 0, 0, ,
,2,2==22= 2 2
;,b ,
;,b ,
,
== = @ @ @ w w w
;,b
;,b
, ,
,
===
!!! @ @ @
;,b /PO/PO/PO _/PO
_/PO
_/PO ;,b == = 2@2@ 2 @


===




+
+

+



0!0! 0 ! 2!2! 20! 0 0
,,
,
==;,b
=;,b
,,
,
(continuous)
(continuous)
(continuous)
@ w
@ w;,b;,b;,b
@ w ;,b --=-= =-
- -

Covariance and
Covariance and
Covariance and
--=
-= =

*Marginal Distributions and
*Marginal Distributions and
*Marginal Distributions and -
1
- 1 - 1-
- -
Correlation Coefficient
Correlation Coefficient
Correlation Coefficient
-,

Conditional Distributions
Conditional Distributions
Conditional Distributions -
,V- ,V=V= =

- -V
, V-
, V ,
,,

,
===



;;;== = =>> w
=>> w
=>> w;,b
;,b ,
;,b,
,
,
,

,

===




,, ,
Bivariate Continuous Uniform
Bivariate Continuous Uniform
Bivariate Continuous Uniform
bbb== = =>> @ =>> @
=>> @ ;,b
;,b ,
;,b,
,
,,

,
==
=

;,b ,
;,b;,b,
,
==1 / Area of domain
=1 / Area of domain
1 / Area of domain
;|b
;|b
;|b
==;,b
=
;,b,
;,b ,
,
bbb

+
++ == Z=
Z Z



++ Z+ Z Z



++
2
+
2
2 PrPrregion
Prregion
region = Area of region / Area of domain
= Area of region / Area of domain
= Area of region / Area of domain


,,
,

*Joint Expected Value and

*Joint Expected Value and
*Joint Expected Value and Bivariate Normal
Bivariate Normal
Bivariate Normal
Conditional Expectation
Conditional Expectation
Conditional Expectation ,,

,
For ~ Normal
For ~ Normal;,;,;;Z;, Z and ~ Normal
For ~ Normal Z
; and ~ Normal
and ~ Normal Z Z Z
b, b,b
b ,b
, b , ,
OO O O O ;,b
;,b
= =
;,b =

,,
,
== =
,,
,

==PO
=POPOPO
PO
,,
,
;,b
;,b
,
;,b,
,














OO O
== = ~ Normal
~ Normal
~ Normal == =
=
= =
, , ,

=
= =
==PO
=POPO
;|b
;|b

;|b
=
= =




Z =
Z Z
=
=


=
= = , where
, where , where
Independence
Independence
Independence ;
;;
*Joint MGF
*Joint MGF
*Joint MGF ;,b ,
;,b ;,b,
,
==;= ;; bbb
== ===b=+
b+ +
b
bbb
;;;
, ,
,=== ;`_b
;`_b
;`_b ;,b
;,b
,,
;,b ,
==;= ;; bbb
;,b;,b;,b
OO O O O



== ===b=ZbZ1b 1
Z
1ZZ Z
==PO =POPOPO @`_w
@`_w
PO @`_w ;,b
;,b
,
;,b,
,







===

,
;,b;,b ;,b,
,===
; ;
;
b b
b Order Statistics
Order Statistics
Order Statistics
== =
(,
;,b;,b (,
;,b)(,
) )
,,
,
==0,= 0, 0, ;,b ;,b
= =0 = 0 0 0=0=
0 min
=
min
min
0, 0,Z
0,,Z,
Z, ,
,.,. .
/_/R
/_/R
/_/R ;,b

== =
(,
(,
)
(,
) )


.
.=.=
max
=
max
max
0, 0,Z
0,,Z,
Z, ,
,.,. .
;,b;,b;,b
_ _ _ /_/R
/_/R
/_/R
Multivariate Transformation
Multivariate Transformation
Multivariate Transformation

3 3.3. .


,
, ,0
,
,
0 ,Z
=Z=;=
;,;,;
;,;0
, , ,

For IID random variables:
For IID random variables:
For IID random variables:

== = , ,
, 0 Z 0 Z0 Z Z
_;,b
;,b;,b
;;; === . . .
;;;
_
@@ @@
_ /_/R
/_/R
/_/R @ @

, ,
,===
;`b





;;;=== ; . . .
;;

;,b;,b;,b ;`b
;`b where
where
where
==@=@ @@
@
@









Insurance and Risk Management
Insurance and Risk Management
Insurance and Risk Management INSURANCE AND RISK MANAGEMENT

Category
Category
Category Definition of Payment,
Definition of Payment,
Definition of Payment, []
[]
[]
OO O
0,
0,
0,
J

J J

;;;


For exponential:
For exponential:
For exponential:
Deductible
Deductible
Deductible =
== OO O

,
, , >
> >



Pr Pr>
Pr >>

J J ;J ; ;

,,, << <

R R R ; ; ;
+

+ +

;;; For exponential:
For exponential:
For exponential:
Policy Limit
Policy Limit
Policy Limit =
==
, , ,








Pr Pr<
Pr < <

R R ;R ; ;

Deductible and Policy Limit

Deductible and Policy Limit
Deductible and Policy Limit 0,0, 0,

J`
J`
J`


;;;
+

+
+

;;;++
+

J J J For exponential:
For exponential:
For exponential:
( is the policy limit/
( is the policy limit/
( is the policy limit/ ==
=
,
, , <
<<<<< ++ +
J`
J`
J`
J J J;;;


Pr Pr<
Pr <<
<
<<
++
+

maximum payment)
maximum payment)
maximum payment) ,, ,
++ +


Unreimbursed Loss,
Unreimbursed Loss,
Unreimbursed Loss,
If is the loss and is the payment (i.e. reimbursed loss), then
If is the loss and is the payment (i.e. reimbursed loss), then
If is the loss and is the payment (i.e. reimbursed loss), then
===
++ +


=
==


, and
===
, and
, and

. . .

* Learn both the discrete and continuous cases
* Learn both the discrete and continuous cases
* Learn both the discrete and continuous cases

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