Expected Value is dimoeblax+b 1s oA EXX+7)J-6GC\+ Cyl + 2erxy3 veg oundiloss or aFWI1+bELy ladle XordY one jnologonrded-er not pouw= ecx2d4+ ety ety =o inca Va OO = EOCI-EUKT* Han Nar CaXbY)= 0% Naw 6d) +b? Var(¥) +20. Gv Oy) Qocall lav (nd) = ntVavOQd)ord Col Va EyJ- PIECYI | we TE Xa Yoreindoperdonk CorO4y)=0 ond yar OGY) = Vee LO) Now CY) TE Kis ave tid than aad x *} =" Nae CX) a EXAMPLE 3A For aloss X on an insurance policy, let X; be the loss amount and X; the loss adjustment expenses, —_ __sothatX= X, +X. The covariance matrix for these random variables is Noch ag Eyanty sy OG x5) Leet dy ar rN) bei ey Kd Calculate the variance in total cost of a loss et ent expenses. Recall. New CX Xa) = a VawlX, + bo Var OX, 4-20 bCov oer ee al )) = 34 or (aXebY wot Now (Xe PNaxeY rab yY),\aeaab=t (XX) The Vow buceot the scumgle mao Xp Naw = RO Super sua Mb Lee to asthe POX Ex) 08 = POY 6 EY) as oe CH )ac.9 => = ie Ue > aA wo(a9 ) but om Gas), ou <7©) __ @I __ 2 Recor: of =z is thal ‘(o Ss oka 1 i | Translate x bey cuddling the morn ~ EXAMPLE 3B A big fire destroyed a building in which 100 of your insureds live. Each insured has a fire insurance — policy. The losses on this policy follow a Pareto distribution with a =3, @ = 2000, Even though all the insureds — live in the Using ____ 95% probability of having enough money in the reserve to pay all the claims, Lok Xen same building, the losses are independent. You are now setting up a reserve for the cost of these losses. the normal approximation, calculate the size of the reserve you should put up if you want to have a kessex Hon Xv Parola (a= 30-2000) 4 axe idagendontso abl [indoor dot oS wesewe Sa SD PHL =045 >) CH) - 045 =w! Gas) > X~u = 16y Puree EOCI= el! AEC AI = 2G) = pee = = 2, \evenu = ot= Zonet - (lece)*. 3,000,000 Sinco the asthe moans = = es AZ| lod 3410 _= (0, ors Ss Mso tho of J of . Se SF ae 1e0 u a,c00pn0 yo = .SsxeF = | 4,320.51 OL X= ean = 645 ay X= 128,u92 24 13,320.51 Exampie3C Fora one-year term life insurance policy of 1000: I @ 7 (i) ) — (iv) The premium is 30. The probability of death during the year is 0.02. — The company has expenses of 2. — If the insured survives to the end of the year, the company pays a dividend of 3.__ __ Ignore interest. = Calculate the variance in the amount of profit the company makes on this policy. 2 Pssbikties : Tasuser lucstso this flaws a Bomoubl: Dishdution Trcsrer dies Peristim Erapenses denabvors So Hore is novorionce fave, Either He Campane pag i) Me ined jemnce foley, 8 00> it) Perdue 31 helves7° Nlar (Gugany pelihon poi) C@-¥)* Vaci)= (ab) -7))-(0e20~3 Koxoa)(one) =IUYB2.SF6Yy —— OK, so quickly—ifa random variable is equal to 20 with probability 0.7 and 120 with probability 0.3, what's — its variance? (Answer below!) Vbe0Xk Li2o-20)*(0.2 Vos) = 2100 BA nv iehich can Oly Assuimee omol 2ucbuss is cabled asin poiuk pride — 3.1, [4B-S93:9) (1 point) If X and Y are independent random variables, which of the following statements are— true? 1. Var(X+ ¥)=Var(X)+ Var(¥) 2. Var(X — Y)= VarlX)+ Var(¥) 8. Var(aX +b Y)= a? E[X?] ~ a(E[X]? +b? EL ¥*] — b(E[Y] (A) (B) 1,2 (© 13 (D) 2,3 ) 12,3 Liste |snce XorBdY are indopudenkse CoulX,Y)=0 tise binte Uae Oey) = Vor bet Ct) ¥) = Var ode Ci) aly) 1yon 2360 => W> {Go =2 h>2 50 n=O 3.4, [151-82-92:4] A company sells group travel-accident life insurance with m payable in the event of a cov- __ ered individual's death in a travel accident. ‘The gross premium for a group is set equal to the expected value plus the standard deviation of the group's — aggregate claims. — ____ The standard premium is based on the following assumptions: = all individual claims within the group are mutually independent; and Gi) m2q(1—q)=2500, where q is the probability of death by travel accident for an individual. Ina certain group of 100 lives, the independence assumption fails because three specific individuals always _— travel together. If one dies in an accident, all three are assumed to die. = Determine the difference between this group's premium and the standard premium. (0 (B) 15 (C) 30 (D) 45 (E) 60 TharsOse BS owmannss, J te kak nutdaeatod accicdunds foo, life 2 A BrnroulliCi se vers (ing dire Vow ancolof 1 |i Gis Less = Var(mA)= rVer(Ai)~= w2q Cig) +220 3 Vanar Aves. fexk 100 $e \low (mM) = | = 250p00 NR \lne bi tom Juer ore indepedonke sorse dima h seu vas Que hn obmepe® Yrrer whe always Sorel beeyadlrer « Opt.” S ongpenale clams 5 am lok Nor (amb) = FN olmn) = 4 (250) We addlyhis lo the otter 2a hwes se aasedl 14 (%5) = (lo6) 10 6 Casco) “ee expected vale of tus sanano Is no ifaw tran the expect cabin of VSSerea in Romans 1 Siectses) - JemGed= i285 ss 3.5. You are given the following information about the random variables X and Y: @ Var(x)=9 i), Var(¥)=4 : — — (iii) Var(2x -. ~~ Determine the correlation coefficient of X and Y. ,_ (A) 0 (B) 0.25 (©) 0.50 (D) 0.75 @®1Cor O= Cov OS Noe CY) 22 12-0! Tapa wor OS Da 27 Nar OO + GY Nar) 42 (20-1) (ov (xy) = 22 bala) 4 Cu) 4 Ge Ky) 2 22= 3664 - uly) = -Ulw xy) 2 oie ule yyy Gy ON) = 5 ie OX = 9, = = Se ES 2 D __ 3.6; [151-82-93:9] (1 point) For a health insurance policy, trended claims will be equal to the product of the claims random variable X and a trend random variable Y. You are given: Gi) EfX}=10 = — ii) Var(x)= 100 Gi) BL Y}=1.20 Gv) VaY) 00 — — (v) Xand Y are independent = Determine the variance of trended claims. = — (A) 444 (B) 145 (©) 146 (D) 147 (E) 148 — Nar Chrendted dazu = Now OK #Y)=N ow O41) Joe XH = EGA) - EOony ECxyg= €Cx1 607 ne Landy ove. whegerndok = 1O¥\.2O= 12 (ECcxNP T= ECD ELS sine Kad More indegendsech Recall orl = EOS - (EDO 50 EOCV= Nar OOs OO)” ELON J~ (oo + vo De Coote vn?) = 290 So Nat ON) = 240 -Q0" = ye © 3.7. X and Y are two independent exponentially distributed random variables. You are given that Var(X) = 25 ___and Var(X Y) = 7500. —_ Determine Var( Y). a) 25 (B) 50 (C) 100 (D) 200 (E) 300 Za H~Eag md EX9 Vane had Yare id Zicahl sonorce ror) boro Bae Nar CY) Le © We dhe mann Gerd go = Ner cl) 52 ess S2s'ss Gaon Hud) Vor (KY): 45.00 won 4500= EOS ECS EO) eC)” 4506 =[25 +6)(ots ot )-[Es6]* =(50)20% ~r5e% F500= loo o~250 =) Fe5qp = F5er ~)IOD sob S B= So Nob CY) = et = 100 ©