102 Session15

Random rates

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Faculty & Institute of Actuaries & are used
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432
Compare these samples
(state the obvious)

433
 Compare these samples
(state the obvious)

Circles are “higher” on average ie they have higher mean

434
Compare these samples

435
 Compare these samples

Circles are more spread on average. Circles vary more

436
Compare these pairs

437
 Compare these pairs

(Circles have same mean and variance in both pairs.)

The second pair co-varies more

– if one rises, the other tends to rise too
438
 Define terms

Expectation = average value (weighted by probability)

Variance = average spread (weighted by probability)

= expectation of (squared) spread

Covariance = average paired-spread (weighted by prob.)

= expectation of paired-spread

439
 Random definitions
Define, and explain as if to a
seven-year-old:

1. Expectation.
2. Variance
3. Covariance
4. Independence

Explain why the definitions are the

way they are 440
 Random results
Prove the following (from their definitions)
and give an illustration of each
E(A + B) = E(A) + E(B)
V(A) := Var(A) = E(A2) – E(A)2
Cov(A,B) = E(AB) – E(A)E(B)
A,B independent => E(AB) = E(A)E(B)
Var(kA) = k2 V(A)
Var(A+B) = Var(A) + Var(B) + 2cov(A,B)
A,B indep. => Var(A+B) = Var(A) + Var(B)441
 Most useful results
You’ll probably use the bold results most
often in random rates questions:
E(A + B) = E(A) + E(B)
V(A) := Var(A) = E(A2) – E(A)2
Cov(A,B) = E(AB) – E(A)E(B)
A,B independent => E(AB) = E(A)E(B)
Var(kA) = k2 V(A)
Var(A+B) = Var(A) + Var(B) + 2cov(A,B)
A,B indep. => Var(A+B) = Var(A) + Var(B) 442
Apr 2003 Q9

443
Apr 2003 Q9

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Specimen Q7

445
Specimen Q7

446
Sep 2002 Q8

447
Sep 2003 Q9

448
Sep 2003 Q9(i)

449
Sep 2003 Q9(ii)

450
Apr 2002 Q11(i)

451
Apr 2002 Q11(i)

452
LogNormal definition

If X ~ LogN(μ,σ2)

How is Log(X) distributed?

453
 LogNormal mean

If X ~ LogN(μ,σ2)

then accept or prove that E(X) = e μ+ ½ σ2

What is E(log X)?

What is log(E(X)) ?

Does E(log X) = log(E(X)) ?

454
LogNormal variance
If X ~ LogN(μ,σ2)

then accept or prove that

Var(X) = (e 2μ+ σ2
) σ2
(e -1)

= 2 σ2
Mean (e -1)

= e σ2
Mean2 -Mean2
455
Finding LogNormal parameters

If X ~ LogN(μ,σ2)

Var(X) = 2 σ2
Mean (e -1)

Mean = e μ+ ½ σ2

So given the mean and variance,

σ
calculate (e -1), then σ, then μ
2

456
Specimen Q14 (i)

457
Specimen Q14 (i)

458
Apr 2000 Q11(i)

459
Apr 2000 Q11(i)

460
Sum of LogNormals

461
You need to accept or prove that …

If you …

add any

normal distribution

to any

normal distribution,

you get a …

normal distribution 462

 Normal result

Assume that if you add two normal

distributions, the result is a normal
distribution.

If X ~ N(μ,σ2) and Y~N(m,s2)

How is X + Y distributed?
463
Apr 2001 Q9(i)

464
Apr 2001 Q9(i)

465
Apr 2000 Q11(ii)a

466
Apr 2000 Q11(ii)a

467
Normal distribution function

Find the Tables for the Standard Normal

distribution function.

If X~N(0,1)

then Probability than X < c =: Φ(c)

468
 Using Normal distribution

If X~N(4,25)
then X – 4 ~ N(0,25) and
(X – 4)/5 ~ N(0,1)

So
Probability that X < 14
= Probability that X – 4 < 14 – 4
= Probability that (X – 4)/5 < (14 – 4)/5= 2
= Probability that N(0,1) < 2 = Φ(2) 469
Sep 2003 Q5

470
Sep 2003 Q5

471
Specimen Q14 (ii)

472
Specimen Q14 (ii)

473
Specimen Q14 (ii)

474
Apr 2000 Q11(ii)b

475
Apr 2000 Q11(ii)b

476
Apr 2002 Q11(ii)&(iii)

477
Apr 2001 Q9(ii)

478
Sep 2000 Q8

479
Sep 2000 Q8

480
Sep 2001 Q6

481
Sep 2001 Q6

482
 END of 102 sessions

See also examiners’ comments

on rounding

483