SMSL/2024

THE UNIVERSITY OF HONG KONG

DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE

STAT2901 Probability and Statistics: Foundations of Actuarial Science

§1 Introduction
1.1 Many real-life problems deal with variability or random phenomena, e.g.

• weather forecast — temperature, wind speed

• insurance/medicine — survival data (time to death, time to recovery)
• finance — stock price, exchange rate
• gambling — random outcomes
• election — exit poll, vote distribution
• transportation — arrival of buses, flight departure times

1.2 Probability and statistics — science or art of understanding and analysing variability and
uncertainty.

• The subject of probability sets up rules under a rigorous mathematical framework to

govern calculation of uncertainty, thereby defining a “calculus of variability”.
• The subject of statistics provides tools and methodologies for data analysis, which are
rigorously justified with the help of probability theory.

1.3 Two schools of interpretation of “probability”:

1. Subjective —
a measure of “chance” as perceived by a person, i.e. how likely that person “feels” that a
designated event may occur. As more observed data are made available, one might adjust
his/her perception from time to time to give the measure a more objective content.
2. Objective —
a measure of chance from a frequentist viewpoint, i.e. long-term proportion of times that a
designated event occurs if the observation process “were” replicated independently many
many times.

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§2 Combinatorial probability
§2.1 Selection of distinguishable objects
2.1.1 A simple rule:
 

 n 1 ways to do job 1 

 
n2 ways to do job 2
 
Total k jobs → .. ⇒ n1 × n2 × · · · × nk ways to do the k jobs


 . 



n ways to do job k 
k

2.1.2 Definition. For any integer n ≥ 0, define the factorial of n, written n!, by
(
1, n = 0,
n! =
n(n − 1) · · · 1, n ≥ 1.

More generally, define a gamma function to be

Z ∞
Γ(x) = y x−1 e−y dy, x > 0.
0

∗ Special case Γ(n + 1) = n! for any integer n ≥ 0.

2.1.3 Theorem. (Binomial Series Theorem)

For any real number α and for any |x| < 1,

α(α − 1) 2 α(α − 1)(α − 2) 3

(1 + x)α = 1 + α x + x + x + ··· .
2! 3!
In particular, if α = n is a positive integer, we have
       
n n n n 2 n n
(1 + x) = + x+ x + ··· + x ,
0 1 2 n
 
n n!
where = is known as a binomial coefficient.
r r!(n − r)!
2.1.4 Ordered selection without replacement
Problem: choose r from n distinguishable objects without replacement in an ordered sequence.
n!
n × (n − 1) × · · · × (n − r + 1) =
Answer: |{z} .
| {z } | {z } (n − r)!
1st item 2nd item r-th item

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 Equivalent problem: allocate r distinguishable objects into n distinguishable cells, with no
cell containing > 1 objects.
Example: Beauty Contest, 15 candidates, how many ways to award Winner, 1st and 2nd runners-
up?
15 × |{z}
Answer: |{z} 14 × |{z}
13 = 2730
Winner 1st 2nd
Special case: If r = n, each possible arrangement is known as a permutation.

2.1.5 Unordered selection without replacement

Problem: n distinguishable objects, choose r from them without replacement in an unordered
sequence.
Answer: Consider a product of n terms
     
n n n 2 n n
(1 + x)(1 + x) · · · (1 + x) = (1 + x) = 1 + x+ x + ··· + x .
1 2 n

No. of ways to select r from n objects in an unordered sequence

= no. of ways to select r x’s from the n brackets above
= coefficient of xr in expansion of (1 + x)n .
 
n
By the Binomial Series Theorem, the answer is .
r
Alternatively, we have n!/(n − r)! ways to pick r objects in an ordered sequence. To each
particular ordered sequence corresponds r! permutations of the r selected objects. They
 should
n!/(n − r)! n
be counted as ONE single way in unordered selection. So there are = ways
r! r
of unordered selection.
Equivalent problem: allocate r indistinguishable objects into n distinguishable cells, with
no cell containing > 1 objects.
Example:
 Beauty
 Contest, 15 candidates, how many ways to select 3 to enter final round?
15
Answer: = 455
3

2.1.6 Ordered selection with replacement

Problem: choose r from n distinguishable objects with replacement in an ordered sequence.
n × |{z}
Answer: |{z} n = nr .
n × · · · × |{z}
1st item 2nd item r-th item

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 Equivalent problem: allocate r distinguishable objects into n distinguishable cells, with no
restriction on no. of objects allocated in each cell. [ e.g. allocating 1st and 2nd objects into jth cell
is equivalent to selecting jth object at 1st and 2nd times. ]

Example: Number lock with 4 digits, each digit may be set to 0, 1, . . . , 9. There are 104 = 10000
different settings.

2.1.7 Unordered selection with replacement

Problem: choose r from n distinguishable objects with replacement in an unordered sequence.
Answer: Consider a product of n terms

(1 + x + x2 + · · · )(1 + x + x2 + · · · ) · · · (1 + x + x2 + · · · ) = (1 + x + x2 + · · · )n = (1 − x)−n .

Picking jth object s times in our selection is equivalent to picking the term xs in the jth
bracket in above expansion of (1 − x)−n .

No. of ways to select a total of r objects (possibly with repetition)

= coefficient of xr in expansion of (1 − x)−n .

By the Binomial Series Theorem, the answer is

 
(−n)(−n − 1) · · · (−n − r + 1) n+r−1
(−1)r = .
r! r

Equivalent problem: allocate r indistinguishable objects into n distinguishable cells, with

no restriction on no. of objects allocated in each cell.
Consider a sequence of n − 1 vertical bars and r circles:

◦ ◦ | ◦ | | ◦ ◦ | ··· | ◦ ◦ ◦

Each such sequence may be regarded as an allocation of r objects into n cells (2 in 1st cell, 1
in 2nd, 0 in 3rd etc.) Thus,

no. of ways of allocation

= no. of permutations of the bars and circles
= no. of ways to select r positions out of n − 1 + r positions to place the circles
 
n+r−1
= .
r

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 Example: 4 distinct food items (burger, fries, cake, ice cream), how many different ways to order
a pack of 3 items?
Answer: 20

2.1.8 Summary

No. of ways to select subsets of size r from a set of n distinguishable objects:

with replacement without replacement
Ordered nr n(n − 1) · · · (n − r + 1)
   
n+r−1 n
Unordered
r r
2.1.9 Partition of distinguishable objects
Problem: partition n distinguishable objects into k groups of sizes n1 , n2 , . . . , nk respectively,
where n = n1 + · · · + nk .
Answer: Consider a product of n terms

(p1 + · · · + pk )(p1 + · · · + pk ) · · · (p1 + · · · + pk ) = (p1 + · · · + pk )n .

Putting ith object into group j is equivalent to picking pj from the ith bracket.

No. of ways of partitioning = coefficient of pn1 1 pn2 2 · · · pnk k in above expansion.

The answer is  
n n!
= ,
n1 , . . . , n k n1 ! n2 ! · · · nk !
which is known as a multinomial coefficient.
Example: consider word “PEPPER”. How many ways to rearrange letters P, E, P, P, E, R into a
6-letter word?
Problem equivalent to partitioning the n = 6 letter positions into k = 3 groups, labelled by ‘P’, ‘E’ and
‘R’ respectively. The 3 groups have sizes n1 = 3, n2 = 2, n1 = 1 respectively. Answer: 60.

2.1.10 Exercises (∗ → more challenging)

(a) In a peace talk on the Middle East, 4 delegates come from the UN, 3 from USA, 5 from Russia
and 2 from Syria. They are to be seated in a row. Americans, Russians and Syrians must be
separated by the UN delegates, and delegates representing the same country must be seated
next to each other. How many ways to seat them?
Answer: 4! 3! 5! 2! × (5 · 4 · 3) = 2, 073, 600.

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 ∗(b) Similar to (a), but with the 14 delegates seated around a circular table. How many ways to
seat them?
Answer: 4! 3! 5! 2! × (3 × 2) × 14 = 2, 903, 040.

(c) A lift can reach 5 different floors. How many exit patterns are there for 8 persons inside the
lift?    
5+8−1 12
Answer: 58 = 390, 625, or = = 495 if the persons are identical robots!
8 8
∗(d) Mary has 5 dresses, 3 skirts, 4 blouses, 3 pairs of shoes, and 2 hats. She always wears shoes
and either a dress or a blouse and a skirt. She may or may not wear a hat.
(i) How many different combinations can she wear?
(ii) Suppose Mary can afford to buy either an extra dress or an extra hat (but not both).
Which should she buy if she decides to maximise the number of different combinations
that she can wear?
(iii) Suppose Mary’s yellow shoes do not match her black or green dress, and that the black
dress does not match her two hats. How many matching combinations can she wear?

§2.2 Definitions
2.2.1 Definition. Consider an experiment with a finite number of different possible outcomes. The
set Ω of all possible outcomes is called the sample space.

2.2.2 An event A is a subset of Ω. It occurs if and only if the outcome of the experiment belongs to
the subset A.

2.2.3 Definition. Assume that each outcome in Ω is equally likely, i.e. has equal chance of occur-
ring. The probability of event A is defined by
no. of outcomes in A
P(A) = .
no. of outcomes in Ω

2.2.4 Example.
If we roll a dice, possible outcomes are Ω = {1, 2, 3, 4, 5, 6}.
The event A = {2, 4, 6} refers to that “an even score turns up”.
The probability of getting an even score is
3 1
P(A) = = .
6 2
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2.2.5 In the above definition, it is important that all outcomes in Ω must be equally likely, such that
for each ω ∈ Ω,
1
P({ω}) = .
no. of outcomes in Ω
Counter-example. When we toss a coin, it can land on a head, a tail OR on its edge. We
may define Ω = {H, T, Edge}. The above definition instructs that

P({H}) = P({T}) = P({Edge}) = 1/3,

which is clearly not sensible.

§2.3 Examples
2.3.1 If we roll 2 dice, what is the probability that the total is 6?
Here Ω = {(1, 1), (1, 2), . . . , (1, 6), (2, 1), . . . , (6, 6)} contains 6 × 6 = 36 outcomes. The event of
interest is
A = {(1, 5), (2, 4), (3, 3), (4, 2), (5, 1)},

which contains 5 outcomes. Thus

5
P(A) = .
36
2.3.2 (Capture-recapture problem)
There are N fish in a lake. Capture k fish, mark them and return them to the lake. Later,
come back and recapture n fish. What is the probability that r out of the n fish recaptured
are marked?  
N
Set Ω = collection of all subsets of size n of the N fish. Then Ω contains outcomes.
n
Take
 A = collection
 of subsets of size n of the N fish containing r marked fish. Then A contains
k N −k
outcomes.
r n−r
Thus,    
k N −k N
P(A) = .
r n−r n

A problem of statistical inference: N unknown, k known and r observed; pick N such that
P(A) is maximum; this is an example of maximum likelihood estimation of the total number
of fish in the lake.

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2.3.3 In a game of bridge, what is the probability that North and South each gets 2 aces?
Take
 Ω =collection of partitions of 52 cards into 3 sets of sizes 13, 13, 26. Then Ω contains
52
outcomes.
13, 13, 26
Take A = collection of partitions of 52cards
 into 3 sets
 of sizes 13, 13, 26 such that the first 2 sets
4 48
contain 2 aces each. Then A contains outcomes. Thus,
2 11, 11, 26
   
4 48 52
P(A) = .
2 11, 11, 26 13, 13, 26

2.3.4 (de Méré’s game)

Roll a dice 4 times. You win $1 if no 6 is found in the 4 throws, otherwise you pay $1 to de
Méré. What is the probability that de Méré wins?
Take Ω = {(1, 1, 1, 1), (1, 1, 1, 2), . . . , (6, 6, 6, 6)}, which contains 64 = 1296 outcomes.
The event that you win is A = {(1, 1, 1, 1), (1, 1, 1, 2), . . . , (5, 5, 5, 5)}, which contains 54 = 625 out-
comes. Thus
P(de Méré wins) = 1 − (625/1296) ≈ 0.5177 > 1/2,

and the game favours de Méré.

An alternative game is suggested as follows. de Méré wins if at least one double six appears
in 24 throws of a pair of dice. Who has the better chance to win?
Now Ω contains 3624 outcomes. The event that you win has 3524 outcomes. Thus

P(de Méré wins) = 1 − (35/36)24 ≈ 0.4914 < 1/2.

This time the game favours you.

Remark:
de Méré argued that in the first game he would experience 4 out of 6 (i.e. 2/3) of all possible outcomes,
one of which (“6”) is favourable. In the second game, again one of the 36 possible outcomes is favourable
and with 24 throws he would experience 24 out of 36 possible outcomes, the proportion is again 2/3.
He thus concluded that the second game is equally favourable to him. What’s wrong with de Méré’s
reasoning?

2.3.5 Toss 2 coins; we can get either 2 heads, 2 tails, or 1 head and 1 tail. So,

P(2 heads) = P(2 tails) = P(1 head & 1 tail) = 1/3.

Correct?

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§2.4 ∗ ∗ ∗ More challenges ∗ ∗ ∗
2.4.1 (a) One fork, two identical chopsticks and three identical spoons are to be put into two baskets,
made of bamboo and plastic respectively, such that each basket contains exactly three objects.
Show that there are altogether six different ways of distributing the objects.
(b) One Communist, two Socialists and three Democrats are forming a coalition government in
the form of a legislative council and an executive council, such that each council consists of
three members. Suppose that the assignment of members to the two councils is completely
random, so that each member has the same chance of sitting in either council. An observer
wants to calculate the probability that no Communists and Democrats sit in the same council.
He argues as follows.
“According to result (a), there are 6 different ways of distributing government people
to two councils. The Communist and the Democrats can be separated in exactly 2
ways. Therefore the probability required is given by the proportion 2/6 ... ”

Is his argument valid? If not, what is the correct answer?

2.4.2 If n people are seated randomly in a row of 2n seats, what is the probability that no two persons
will sit on adjacent seats?