ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
ACTL2002/ACTL5101 Probability and Statistics
c Katja Ignatieva
School of Risk and Actuarial Studies
Australian School of Business
University of New South Wales
k.ignatieva@unsw.edu.au
Week 3 Video Lecture Notes
Week 2
Week 3
Week 4
Probability: Week 1
Week 6
Review
Estimation: Week 5
Week
7
Week
8
Week 9
Hypothesis testing:
Week
10
Week
11
Week
12
Linear regression:
Week 2 VL
Week 4 VL
Week 5 VL
Video lectures: Week 1 VL
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Introduction
Special sampling distributions & sample mean and variance
Numerical methods to summarize data
Introduction
Measures of location & spread
Numerical example
Graphical procedures to summarize data
Summarizing data
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Introduction
Population vs sample
Population: the large body of data;
Sample: a subset of the population.
Question: For the following four cases would we refer to a
population or sample:
1.
2.
3.
4.
All the actuaries in Australia;
The temperature on 5, randomly chosen, days;
All NSW cars;
The basket of goods of each fifth customer on a given day.
Solution: 1. Population; 2. Sample; 3. Population 4. Sample.
402/420
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Introduction
Summarising data: Numerical approaches
Given a set of observations x1 , x2 , x3 , . . . , xn selected from a
population (usually assumed i.i.d. (independent and identically
distributed)).
Sorted data in ascending order: x(1) , x(2) , . . . , x(n) , such that
x(1) is the smallest and x(n) is the largest.
Objectives:
 Understand the main features of data and to summarise data
(essential first step in analysing data);
 Make inferences about the population
(more on this later in the course).
403/420
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Measures of location & spread
Special sampling distributions & sample mean and variance
Numerical methods to summarize data
Introduction
Measures of location & spread
Numerical example
Graphical procedures to summarize data
Summarizing data
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Measures of location & spread
Measures of location
Used to estimate the central point of the sample, also called
measures of central tendency:
The sample mean is given by:
x=
n
1 X
xk
n
k=1
The population mean is given by:
X
x =
pX (x) x
all x
100% trimmed mean, the average of the observations after
discarding the lowest 100% and highest 100%:
x(bnc+1) + . . . + x(nbnc)
e
x =
,
n 2bnc
404/420
where bnc is the greatest integer less than or equal to n.
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Measures of location & spread
Measures of spread
The sample variance:
s2 =
n
X
1
1
(xk x)2 =
n1
n1
k=1
!
n
X
1
xk2 n x 2 .
n1
n
X
xk2 +
k=1
n
X
k=1
x2 2
n
X
!
xk x
k=1
k=1
The population variance:
X
X
2 = Var (X ) =
pX (x) (x X )2 =
pX (x) x 2 2X
all x
all x
s 2.
Population standard deviation: = 2 .
Sample standard deviation: s =
405/420
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Measures of location & spread
Quantiles
P , th quantile or ( 100)th percentile:
1
1
[number of xk <P ] [number of xk P ]
n
n
approximated by linear interpolation as the ((n 1) + 1)th
observation.
Quartiles: Q1 (25th percentile) and Q3 (75th percentile).
Quantile function: FX1 (u), u [0, 1], where FX (x) = u.
Question: What are the 0.025, 0.16, 0.5, 0.84 and 0.975
quantiles of the N(0,1) distribution?
406/420
Solution: They are 1.96, 1, 0, 1 and 1.96, respectively.
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Measures of location & spread
Mode: The mode m is the value that maximises the p.m.f.
pX (x) in the discrete case or the p.d.f. fX (x) in the
continuous case.
Median, M:
x n+1 ,
if n is odd;
(
2 )
M=
12 x n + x n +1 , if n is even.
( )
(
)
2
Median absolute deviation:
MAD = median of the numbers:{xi M}.
Range:
R = x(n) x(1) .
Interquartile range:
IQR = Q3 Q1 .
407/420
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Numerical example
Special sampling distributions & sample mean and variance
Numerical methods to summarize data
Introduction
Measures of location & spread
Numerical example
Graphical procedures to summarize data
Summarizing data
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Numerical example
Numerical example
An insurance company has occurred the 26 claims with the
following amounts:
1 120
990
450
478
1 000
975
1 000
584
760
346
2 430
1 406
348
1 100
1 245
760
1 548
752
850
1 000
with
26
P
xi
= 25 855;
i=1
26
P
xi2 = 36 904 873.
i=1
408/420
3 400
335
605
588
1 245
540
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Numerical example
Numerical example
First step: arrange in ascending order:
335
346
348
450
478
540
584
409/420
588
605
752
760
760
850
975
990
1 000
1 000
1 000
1 100
1 120
1 245
1 245
1 406
1 548
2 430
3 400
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Numerical example
Numerical example
Some statistics:
Mean:
x=
n
1 X
25 855
xi =
= 994.42.
n
26
i=1
Variance:
s2 =
n1
n
X
!
xi2 n x 2
i=1
1
36 904 873 26 (994.42)2
=
25
= 447, 762.6.
Standard deviation:
s=
410/420
447 762.6 = 669.2.
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Numerical example
Numerical example
Determine P0.35 , i.e., the 35th percentile (0.35 quantile)
This is the (25 (0.35)) + 1 = 9.75th observation.
Then, linear interpolation gives:
P0.35 = x(9) + 0.75 x(10) x(9)
= 605 + 0.75 (147) = 715.25
= 0.25 x(9) + 0.75 x(10)
411/420
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Numerical example
Numerical example
Recall: x(1) = 335
and
x(26) = 3, 400.
Range:
R = 3, 400 335 = 3, 065.
Quartiles:
Q1
= x(250.25+1)
= x(6.25)
= 0.75x(6) + 0.25x(7)
= 585
Q2
= M = x(250.5+1)
= x(13.5)
= x(13) + x(14) /2
= 912.5
Q3
= x(250.75+1)
= x(19.75)
= 0.25x(19) + 0.75x(20)
= 1, 115
Interquartile range:
IQR = Q3 Q1 = 1, 115 585 = 530.
412/420
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Numerical methods to summarize data
Numerical example
Numerical example
Determine the 10% trimmed mean:
Step 1: Compute bnc = b26 (0.1)c = 2.
Hence, we should discard the 2 smallest and the 2 largest of
the observations.
Step 2: Compute the trimmed mean:
e
x0.10 =
413/420
x(3) + . . . + x(24)
= 879.27.
22
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Graphical procedures to summarize data
Summarizing data
Special sampling distributions & sample mean and variance
Numerical methods to summarize data
Introduction
Measures of location & spread
Numerical example
Graphical procedures to summarize data
Summarizing data
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Graphical procedures to summarize data
Summarizing data
Empirical cumulative distribution function (ecdf)
Given a set of observations x1 , . . . , xn the empirical cumulative
distribution function is given by:
1
Fn (x) = (number of observations IXk x )
n
E[Fn (x)] =FX (x)
1
Var (Fn (x)) = FX (x) (1 FX (x)) .
n
Note: pn (x) = IXk =x /n, the proportion of observations equal
to x.
414/420
Proves for E[Fn (x)] and Var (Fn (x)) are not part of the
course.
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Graphical procedures to summarize data
Summarizing data
E.c.d.f.
1
0.9
Data:
0.8
335
450
584
752
850
1000
1100
1245
2430
0.7
F26(x)
0.6
0.5
0.4
0.3
0.2
0.1
0
0
415/420
500
1000
1500
2000
Claim amount
2500
3000
3500
346
478
588
760
975
1000
1120
1406
3400
348
540
605
760
990
1000
1245
1548
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Graphical procedures to summarize data
Summarizing data
Histogram
14
Data:
12
335
450
584
752
850
1000
1100
1245
2430
Frequency
10
8
6
4
2
0
0
416/420
500
1000
1500
2000
Claim amount
2500
3000
346
478
588
760
975
1000
1120
1406
3400
3500
Quant the number of observations in each bin (0, 500], (500, 1000],
(1000, 1500], (1500, 2000], (2000, 2500], (2500, 3000], (3000, 3500].
Bin sizes chosen such that it provides good summary of the data, i.e., not
too short and not too long.
348
540
605
760
990
1000
1245
1548
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Graphical procedures to summarize data
Summarizing data
Stemandleaf display
Data:
Stemandleaf:
0
0
1
1
2
2
3
417/420







333
5556668889
0000011224
5
4
4
335
450
584
752
850
1000
1100
1245
2430
346
478
588
760
975
1000
1120
1406
3400
Each row corresponds to a bin.
The number before  displays the number of thousands (or hundreds/tens
etc.).
Each number after  displays the 3rd (or 2nd /1st ) digit of an observation.
Note: rounding!
348
540
605
760
990
1000
1245
1548
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Graphical procedures to summarize data
Summarizing data
Boxplot (BoxandWhiskers plot)
Boxplot
3500
Data:
3000
Claim size
2500
2000
1500
1000
500
335
450
584
752
850
1000
1100
1245
2430
418/420
Red line: median; Blue box: Q1 and Q3 (height of box: IQR)
Black lines: 10th and 90th percentile
Red circles: outliers.
346
478
588
760
975
1000
1120
1406
3400
348
540
605
760
990
1000
1245
1548
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Graphical procedures to summarize data
Summarizing data
QQ plot calculations
This is done by plotting the quantile function of your chosen
distribution against the order statistics, x(i) .
A small continuity adjustment is made, too.
For the example above, a standard normal QQ plot, we have:
i
1
2
25
26
i0.5
26
x(i)
419/420
i0.5
26
0.019 2
0.057 7
0.942 3
0.980 8
2.069 9
1.574 4
1.574 4
2.069 9
335
346
2 430
3 400
ACTL2002/ACTL5101 Probability and Statistics: Week 3 Video Lecture Notes
Graphical procedures to summarize data
Summarizing data
QQ plot (quantilequantile plot)
QQ plot
2.5
Data:
Standard normal quantiles
1.5
335
450
584
752
850
1000
1100
1245
2430
1
0.5
0
0.5
1
1.5
2
2.5
0
420/420
500
1000
1500
2000
Claim size
2500
3000
346
478
588
760
975
1000
1120
1406
3400
3500
QQ plot displays if a distribution is a correct approximation and/or when
not (tails).
Calculations: see previous slide.
348
540
605
760
990
1000
1245
1548
ACTL2002/ACTL5101 Probability and Statistics: Week 3
ACTL2002/ACTL5101 Probability and Statistics
c Katja Ignatieva
School of Risk and Actuarial Studies
Australian School of Business
University of New South Wales
k.ignatieva@unsw.edu.au
Week 3
Week 2
Week 4
Probability: Week 1
Week 6
Review
Estimation: Week 5
Week
7
Week
8
Week 9
Hypothesis testing:
Week
10
Week
11
Week
12
Linear regression:
Week 2 VL
Week 3 VL
Week 4 VL
Video lectures: Week 1 VL
Week 5 VL
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Last two weeks
Introduction to probability;
Definition of probability measure, events;
Calculating with probabilities; Multiplication rule,
permutation, combination & multinomial;
Distribution function;
Moments: (non)central moments, mean, variance (standard
deviation), skewness & kurtosis;
Generating functions;
Special (parametric) univariate distributions.
501/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
This week
Joint probabilities:
 Discrete and continuous random variables;
 Bivariate and multivariate random variables;
Covariance;
Correlation;
Law of iterative expectations;
Conditional variance identity.
502/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Introduction
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Introduction
The Bivariate Case
We are often interested in the joint behavior of two (or more)
random variables.
Denote a bivariate random vector by a pair as follows:
X = [X1 , X2 ]> . The joint distribution function of X is:
FX1 ,X2 (x1 , x2 ) = Pr (X1 x1 , X2 x2 ) .
We can write:
Pr (a1 X1 b1 , a2 X2 b2 ) =FX1 ,X2 (b1 , b2 )
FX1 ,X2 (b1 , a2 )
FX1 ,X2 (a1 , b2 )
+ FX1 ,X2 (a1 , a2 ) .
503/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Introduction
Discrete Random Variables
In the case where X1 and X2 are both discrete random
variables which can take values
x11 , x12 , . . .
and
x21 , x22 , . . .
respectively, we define:
pX1 ,X2 (x1i , x2j ) = Pr (X1 = x1i , X2 = x2j ) ,
for i, j = 1, 2, . . .
as the joint probability mass function of X , then:
X
X
i=1 j=1
504/562
pX1 ,X2 (x1i , x2j ) = 1.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Introduction
Discrete Random Variables
The marginal p.m.f. of X1 and X2 are respectively
pX1 (x1i ) =
pX1 ,X2 (x1i , x2j )
j=1
and
pX2 (x2j ) =
pX1 ,X2 (x1i , x2j ) .
i=1
(sum over the other random variable(s)).
Prove: use Law of Total Probability.
505/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Introduction
Example discrete random variables
An insurer offers both disability insurance (DI) and
unemployment insurance (UI) to small companies.
Most companies buy DI and UI, because of a large discount.
The claims are categorized in no claims, mild claims, and
severe claims.
Last year the 100 insured felt in the following categories:
DI
UI
#
506/562
no
no
74
no
mild
6
no
severe
2
mild
no
3
mild
mild
2
mild
severe
4
severe
no
1
severe
mild
3
Question: Find the marginal p.m.f. of DI and UI.
no
mild
Solution: x
74+6+2
3+2+4
pDI (x)
= 0.82
100
100 = 0.09
6+2+3
pUI (x) 74+3+1
=
0.78
100
100 = 0.11
severe
severe
5
severe
= 0.09
= 0.11
1+3+5
100
2+4+5
100
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Introduction
Continuous Random Variables
In the case where X1 and X2 are both continuous random
variables, we set the joint density function of X as
fX1 ,X2 (X1 , X2 ) =
FX ,X (x1 , x2 )
x1 x2 1 2
and therefore the joint cumulative density function is given by:
Z x2 Z x1
FX1 ,X2 (x1 , x2 ) =
fX1 ,X2 (z1 , z2 ) dz1 dz2 .
Note:
Z
FX1 ,X2 (, ) =
FX1 ,X2 (, ) =
507/562
fX1 ,X2
Z Z
(z1 , z2 ) dz1 dz2 = 1
fX1 ,X2 (z1 , z2 ) dz1 dz2 = 0.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Introduction
Continuous Random Variables
The marginal density function of X1 and X2 are respectively:
Z
Z
fX1 ,X2 (z1 , x2 ) dz1 .
fX1 (x1 ) =
fX1 ,X2 (x1 , z2 ) dz2 and fX2 (x2 ) =
The marginal cumulative distribution function of X1 and X2
are then respectively:
Z x1
Z x2
FX1 (x1 ) =
fX1 (u) du
and
FX2 (x2 ) =
fX2 (u) du,
or, alternatively:
Z
FX1 (x1 ) =
and FX2 (x2 ) =
508/562
x1
fX (u1 , u2 ) du1 du2
Z
x2 Z
fX (u1 , u2 ) du1 du2 .
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Introduction
Continuous Random Variables: example
The joint p.d.f. of X and Y is given by:
fX ,Y = 4 x (1 y ),
for 0 x, y 1, and 0 otherwise.
R
a. The marginal p.d.f. of X is: fX (x) = fX ,Y (x, y )dy =
R1
2 1
0 4 x (1 y )dy = 4 x (y 1/2 y ) 0 = 2x.
509/562
b. The marginal
x
R x c.d.f. of X Ris:x
FX (x) = fX (z)dz = 0 2zdz = z 2 0 = x 2 , if 0 x 1
and zero if x < 0 and one if x > 1.
R
c. The marginal p.d.f. of Y is: fY (y ) = fX ,Y (x, y )dx =
1
R1
2
0 4 x (1 y )dx = 1/2 4 x (1 y ) 0 = 2(1 y ).
Ry
d. The marginal c.d.f. of Y is: FY (y ) = fY (z)dz =
Ry
2 y
2
0 2(1 z)dz = 2z z 0 = 2y y , if 0 y 1 and zero
if y < 0 and one if y > 1.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Exercise: Discrete case
Let X be the random variable taking one if there is a positive
return on the asset portfolio and zero otherwise.
Let Y be the random variable for the claims for home
insurance, which can take value 0, 1, 2, and 3 for few, normal,
many claims and a large number of claims due to floods,
respectively.
The marginal probability mass functions of X and Y are:
X =x
0
1
510/562
Pr (X = x)
1/2
1/2
and
Y =y
0
1
2
3
Pr (Y = y )
1/8
3/8
3/8
1/8
Question: What would be the joint probability density
function if X and Y are independent?
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Exercise: Discrete case
Solution: If the two are independent, we would have:
Pr (X = x, Y = y ) = Pr (X = x) Pr (Y = y )
For all X = x and Y = y the joint distribution, if they are
independent, is described in the table below:
Pr(X = x, Y = y )
X =x
0
1
511/562
0
1/16
1/16
Y =y
1
2
3/16 3/16
3/16 3/16
3
1/16
1/16
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Exercise: Discrete case
Suppose instead they are not independent and their joint
distribution could be described as:
Pr(X = x, Y = y )
X =x
0
1
0
0
1/8
Y =y
1
2
3/16 3/16
3/16 3/16
3
1/8
0
Question: Proof that X and Y are dependent.
Solution: We have Pr(Y = 3) = 1/8 and Pr(X = 1) = 1/2,
however Y takes the value 3 the probability that X takes the
value 1 is zero (joint probability of Y = 3 and X = 1 is zero).
512/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Example: Multinomial distribution
Suppose we have n independent trials with r outcomes with
probabilities p1 , p2 , . . . , pr .
The joint frequency distribution is given by:
pN1 ,N2 ,...,Nr (n1 , n2 , . . . , nr ) =
n!
p n1 p2n2 . . . prnr .
n1 ! n2 ! . . . nr ! 1
The marginal distribution is (Binomial distribution!) given by:
X
X
X X
pNi (ni ) =
,...,
,
,...,
pN1 ,N2 ,...,Nr (n1 , n2 , . . . , nr )
N1
Ni1 Ni+1
Nr
n
=
pini (1 pi )nni .
ni
Can do this by summing the marginals.
* Using Binomial expansion (prove not required).
513/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Exercise: Continuous case
Now consider an example of a bivariate random vector
[X , Y ]> whose joint density function is:
fX ,Y (x, y ) = c x 2 + xy ,
for 0 x 1 and 0 y 1,
and zero otherwise. To find the constant c, it must be a valid
density so that:
Z Z
Z 1Z 1
1=
fX ,Y (x, y ) dxdy =
c x 2 + xy dxdy
Z
=c
0
1
1 3 1 2
x + x y
3
2
1
1
1
dy =c y + y 2
3
4
0
1
=c
0
Hence, c = 12/7, then also fX ,Y (x, y ) 0 for all x, y .
a. Question: Find the marginal densities.
514/562
b. Question: Find the joint distribution function.
7
.
12
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Exercise: Continuous case
a. Solution: Knowing the constant, we can then determine the
marginal densities. First the marginal density for X :
Z
Z 1
12 2
x + xy dy
fX (x) =
fX ,Y (x, y )dy =
0 7
12
1
=
x 2 + x , for 0 x 1,
7
2
and zero otherwise, and for Y :
Z
Z 1
12 2
fY (y ) =
fX ,Y (x, y )dx =
x + xy dx
0 7
12 1 1
=
+ y , for 0 y 1,
7 3 2
515/562
and zero otherwise.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Exercise: Continuous case
b. Solution: You can also determine the joint distribution
function if 0 x 1, 0 y 1 by:
Z y Z x
Z yZ x
12 2
u + uv dudv
FX ,Y (x, y ) =
fX ,Y (u, v )dudv =
0
0 7
x
Z y
Z y
12 1 3 1 2
12 1 3 1 2
dv =
=
u + u v
x + x v
7 3
2
3
2
0 7
0
0
y
12 1 3
1
12 1 3
1
=
x v + x 2v 2
=
x y + x 2y 2 .
7 3
4
7 3
4
0
Hence:
FX ,Y
516/562
0,
12
if x < 0 or y < 0;
1 2 2
+
x
y
, if 0 x 1, 0 y 1;
7
4
(x, y ) =
F (x) ,
if y > 1;
X
FY (y ) ,
if x > 1.
1 3
3x y
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Exercise: Continuous case
joint p.d.f.
marginal p.d.f.
1.5
1
0.5
0
0.5
1.5
FX(x)
FX,Y(x,y)
1.5
0.5
0
1
1
0.5
0
0 0.5
y0.5 0.5
x
1.5
0.5
0.5
1.5
0.5
0.5
F (y)
marginal p.d.f.
1.5
0
0.5
0.5
517/562
0.5
1
x
slide 519
1.5
0
0
0.5
y
1.5
0.5
0.5
0.5
x
1.5
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Exercise: Continuous case
You can then determine the marginal distributions:
0,
if x < 0;
12 1 3
1 2
FX (x) = FX ,Y (x, 1) =
x + 4 x , if 0 x 1;
7 3
1,
if x > 1,
and
FY (y ) = FX ,Y (1, y ) =
0,
12
7
1,
1
3y
1 2
4y
if y < 0;
, if 0 y 1;
if y > 1.
Can you confirm the marginal densities are correct?
518/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Exercises
Exercise: Continuous case
It becomes straightforward to compute probability statements such
as (using lower right panel on slide 517):
Z
1Z y
12 2
x + xy dxdy
0
0 7
y
Z 1 3
x
x 2y
12
+
dy
=
7
3
2
0
0
Z 1 3
y
12
y3
=
+
dy
7
3
2
0
1
Z 1
12 5 y 4
5
12 5 3
y dy =
= ,
=
7
6
7
6
4
14
0
0
R R
so that Pr (X > Y ) = y fX ,Y (x, y )dxdy = 9/14.
Pr (X < Y ) =
519/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Means
Consider the bivariate random vector X = [X1 X2 ]> .
The mean of X is the vector whose elements are the means of
X1 and X2 , that is,
E [X1 ]
1
=
.
E[X ] =
E [X2 ]
2
If X1 , X2 , . . . , Xn are jointly distributed random variables with
expectations E [Xi ] for i = 1, . . . , n and Y is a affine function
of the Xi , i.e.,
n
X
Y =a+
bi Xi ,
i=1
then, we have the additively rule:
"
#
n
n
n
X
X
X
E [Y ] =E a +
bi Xi = a +
E [bi Xi ] =a +
bi E [Xi ] .
520/562
i=1
i=1
i=1
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Variances, Covariances
Recall: variance of X is a measure for the spread of X .
Covariance is a measure of the spread between X1 and X2 .
The variance of the random vector X is also called the
variancecovariance matrix:
2
Var (X1 )
Cov (X1 , X2 )
1 12
Var (X ) =
=
,
Cov (X1 , X2 )
Var (X2 )
12 22
where the covariance is defined as:
Cov (X1 , X2 ) 12 =E [(X1 1 ) (X2 2 )]
=E [X1 X2 X1 2 1 X2 + 1 2 ]
=E [X1 X2 ] E [X1 ] E [X2 ] .
521/562
Note: Cov (Xi , Xi ) = ii = i2 , and covariance only defined
for two r.v..
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Example: Consider the example from slide 506.
Let no=0, mild=1, and
severe=2.
0.8
Question: Calculate the mean of
X1 = DI and X2 = UI .
0.6
0.4
Solution:
E [X1 ] = 3+2+4
100 1 +
6+2+3
E [X2 ] = 100 1 +
0.2
0
2 = 0.27.
2 = 0.33.
Question: Calculate the covariance
between X1 and X2 .
No
Mild
Severe
Mild
Severe
UI
522/562
1+3+5
100
2+4+5
100
No
DI
Question: Is covariance
positive or negative?
Solution:
E [X1 X2 ] = 0.02 1 1 + 0.04 1 2 +
0.03 2 1 + 0.05 2 2 = 0.36.
Cov (X1 , X2 ) = E [X1 X2 ] E [X1 ]
E [X2 ] = 0.36 0.27 0.33 = 0.2709.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Example: Consider the example from slide 509.
Question: Calculate the means.
R
Solution: E [X1 ] = x fX (x)dx =
R1 2
3 1
0 2x dx R= [2/3 x ]0 = 2/3.
R1
E [X2 ] = y fY (y )dx = 0 y 2
(1 y )dy = [y 2 2/3y 3 ]10 = 1/3.
fX,Y(x,y)
3
2
Question: Calculate the covariance
between X1 and X2 .
1
0
1
1
0.5
y
523/562
0.5
0 0
Question: Is covariance
positive or negative?
Solution:
R R
E [X1 X2 ] = fX ,Y (x, y ) x
R1R1
ydxdy = 0 0 4 x 2 (y y 2 )dxdy =
R1
2
0 4/3(y y )dy = 4/6 4/9 = 4/18.
Cov (X1 , X2 ) = E [X1 X2 ] E [X1 ]
E [X2 ] = 4/18 2/3 1/3 = 0.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
524/562
Let X Beta(0.2, 1) (prob of a claim) and Y X NB(3, X )
(Y BetaNegativeBinomial). Home insurance, insured qualified
as bad risk if 3 claims within 50 quarters.
Question: Does it have a negative or positive covariance?
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Properties of Covariance
If X and Y are jointly distributed random variables with
expectations X and Y the covariance of X and Y is
Cov (X , Y ) =E [(X X ) (Y Y )]
=E [X Y X Y Y X + X Y ]
=E [X Y ] X Y .
If X and Y are independent:
Cov (X , Y ) = E [X Y ] X Y = E [X ] E [Y ] X Y = 0.
* using independence X , Y .
525/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Properties of Covariance
Let X , Y , Z be random variables, and a, b < we have:
Cov (a + X , Y ) =E [(a + X (a + X )) (Y Y )]
=E [(X X ) (Y Y )]
=Cov (X , Y )
Cov (a X , b Y ) =E [(a X a X ) (b Y b Y )]
=E [a (X X ) b (Y Y )]
=a b E [(X X ) (Y Y )] = a b Cov (X , Y )
Cov (X , Y + Z ) =E [(X X ) (Y + Z Y Z )]
=E [(X X ) ((Y Y ) + (Z Z ))]
=E [(X X ) (Y Y ) + (X X ) (Z Z )]
=Cov (X , Y ) + Cov (X , Z ) .
526/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Properties of Covariance
Suppose X1 , X2 ,Y1 and Y2 are r.v., and a, b, c, d <, then:
Cov (aX1 + bX2 , cY1 + dY2 ) =Cov (aX1 + bX2 , cY1 )
+ Cov (aX1 + bX2 , dY2 )
=Cov (aX1 , cY1 ) + Cov (aX1 , dY2 )
+ Cov (bX2 , cY1 ) + Cov (bX2 , dY2 )
=acCov (X1 , Y1 ) + adCov (X1 , Y2 )
+ bcCov (X2 , Y1 ) + bdCov (X2 , Y2 ) .
* using: Cov (X , Y + Z ) = Cov (X , Y ) + Cov (X , Z ).
** using: Cov (aX , bY ) = abCov (X , Y ).
527/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Properties of Covariance
Let Xi , Yi be r.v., a, bi , c, dj < for i = 1, . . . , n and
j = 1, . . . , m.
We can generalize this as follows:
Suppose:
U =a+
n
X
bi Xi
and
i=1
V =c+
m
X
dj Yj .
j=1
Then:
Cov (U, V ) =
n X
m
X
i=1 j=1
528/562
bi dj Cov (Xi , Yj ) .
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Properties of Covariance
Note that Cov (X , X ) = Var (X ), so we have the variance of
the sum of r.v. is:
Var (X1 + X2 ) =Cov (X1 + X2 , X1 + X2 )
=Cov (X1 , X1 ) + Cov (X2 , X2 ) + 2Cov (X1 , X2 )
=Var (X1 ) + Var (X2 ) +2Cov (X1 , X2 ).
Also,
Var (aX1 ) = Cov (aX1 , aX1 ) = a2 Cov (X1 , X1 ) = a2 Var (X1 ) ,
using the result that we can take a constants out of a
covariance.
529/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Example Covariance
Consider the example from slides 506 and 522.
The costs for disability insurance are $1 million if mild and $2
million if severe.
The costs for unemployment insurance are $0.5 million if mild
and $1 million if severe.
The price of the contract is the expected value plus half the
standard deviation.
530/562
Question: What is the price for DI, UI, and DI and UI
combined?
1+3+5
2
2
Solution:
E X12 = 3+2+4
100 1 + 100 2 = 0.45 and
2 6+2+3
2+4+5
2
2
E X2 = 100 1 + 100 2 = 0.55.
Var (X1 ) = E X12 (E [X1 ])2 = 0.45 0.272 = 0.3771 and
Var (X2 ) = E X22 (E [X2 ])2 = 0.55 0.332 = 0.4411.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Solution (cont.)
Price DI (=1 million X1 ):
p
Var (X1 million)/2
q
=E [X1 ] million + Var (X1 ) million2 /2
p
=0.27million + 0.3771 million2 = 0.5770million.
Price DI =E [X1 million] +
Price UI (=0.5 million X2 ):
p
Var (X2 0.5 million)/2
q
=E [X2 ] 0.5 million + Var (X2 ) 0.25 million2 /2
p
=0.165million + 0.4411 0.25 million2 /2
Price UI =E [X2 0.5 million] +
=0.3310million.
531/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Means, Variances, Covariances
Solution (cont.)
Price DI and UI combined (=1 million X1 + 0.5 million
X2 ):
Price UI and DI =E [X1 million + X2 0.5 million]
p
+ Var (X1 million + X2 0.5 million)/2
=E [X1 ] million + E [X2 ] 0.5 million
q
+ Var (X1 ) million2 + Var (X2 ) 0.25 million2
+2Cov (X1 , X2 )0.5 million2 /2
=0.27million + 0.165million
q
+ (0.3771 + 0.441/4 + 0.2709) million2 /2
=0.8704million.
532/562
This gives a 4.15% discount!
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Correlation coefficient
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Correlation coefficient
Correlation coefficient
Large covariance: high dependency or large variance?
We define the correlation coefficient between X1 and X2 :
(X1 , X2 ) p
Cov (X1 , X2 )
Var (X1 ) Var (X2 )
provided Cov (X1 , X2 ) exists and the variances Var (X1 ) and
Var (X2 ) are each nonzero.
The value of the correlation coefficient is always between 1
and 1, i.e.
1 (X1 , X2 ) 1.
Note: correlation coefficient is only defined for 2 r.v..
533/562
Prove: see next slides.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Correlation coefficient
Prove: Let Y =
X1
1
X2
2 ,
Var (Y ) 0 we have:
X1 X2
0 Var
1
2
X2
X1 X2
X1
+ Var
2Cov
,
=Var
1
2
1 2
1
1
1 1
= 2 Var (X1 ) + 2 Var (X2 ) 2
Cov (X1 , X2 )
1 2
1
2

{z
}

{z
} 
{z
}
=1
=1
Var (X1 )Var (X2 )
=
1 2
=2 (1 ) .
Consequently, we see that 1 because the variance of a
random variable is nonnegative.
Proof continues next slide.
534/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Correlation coefficient
Similarly by considering Y =
0 Var
X1
1
X1 X2
+
1
2
X2
2 ,
Var (Y ) 0 we have:
= 2 (1 + ) ,
we see that 1, which proves the result.
The correlation coefficient gives a measure of the linear
relationship between the two variables. In fact, = 1 gives:
Pr (X2 = aX1 + b) = 1
for some constants a 6= 0 and b so that you can write an
affine relationship between the two.
535/562
Question: Does a correlation of zero implies independence?
Solution:
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Correlation coefficient
Note that we have that if X , Y are independent, then
Cov (X , Y ) = 0, hence:
Cov (X , Y )
0
(X , Y ) = p
=p
= 0.
Var (X ) Var (Y )
Var (X ) Var (Y )
However, the reverse does not need to hold.
Let X , Y be r.v. with j.p.m.f. (we have set X = Y 2 ):
Pr(X = x, Y = y )
X =x
0
1
1
0
1/3
Y =y
0
1
1/3
0
0
1/3
We have E [Y ] = 0, E [X ] = 2/3, and E [XY ] = 0. We have:
Cov (X , Y )
E [XY ] E [X ] E [Y ]
(X , Y ) = p
= p
= 0.
Var (X ) Var (Y )
Var (X ) Var (Y )
536/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Correlation coefficient
Correlation coefficient
6
5
4
3
quadratic dependence
linear dependence
1
0
1
2
1.5
537/562
0.5
=0
0.5
1
X
=0.9
=0.9
1.5
=0
2.5
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Conditional Distributions
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Conditional Distributions
Conditional Distributions: Discrete case
Let X , Y be random variables with j.p.m.f.
Pr (X = xi , Y = yj ).
The conditional probability of X given Y is:
Pr (X = xi Y = yj ) =
Pr (X = xi , Y = yj )
.
Pr (Y = yj )
If Pr (Y = yj ) = 0, then we define Pr (X = xi Y = yj ) = 0.
Example: Let X POI(3), Y POI(2), and X and Y are
independent.
We have:
Pr(X = 2Y = 3)=
538/562
Pr(X = 2, Y = 3) Pr(X = 2) Pr(Y = 3)
=
=Pr(X = 2).
Pr(Y = 3)
Pr(Y = 3)
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Conditional Distributions
Conditional Distributions: Continuous case
Let X , Y be random variables with j.p.d.f. fX ,Y (x, y ).
The conditional density of Y given X is:
fY X (y x) =
fX ,Y (x, y )
fX (x)
If fX (x) = 0, then we define fY X (y x) = 0.
Example: consider the example from slide 509.
Question: Find fX Y (xy = 0.5)
Solution: fX Y (xy = 0.5) =
539/562
fX ,Y (x,0.5)
fY (0.5)
2x
1
= 2x.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Conditional Distributions
Application: an imperfect particle counter
Define the random variable N as the number of incoming
claims and X as claims paid. Probability of a fraudulent claim
is q = 1 p and number of claims paid is Binomial:
(X N = n) Binomial (n, p) .
If the number of incoming claims follows a Poisson
distribution (with parameter ) then the number of claims
paid turns out to also be Poisson with parameter p. This is
an example of thinning of a Poisson probability.
We will see more on thinning of a Poisson probability in
ACLT2003/5103 using Markov chains.
Proof: See next slides.
540/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Conditional Distributions
Application: an imperfect particle counter
Proof: the law of total probability (why can we apply it
here?) gives:
Pr (X = k) =
=
=
Pr (X = k N = n ) Pr (N = n)
n=0
X
n=k
X
n=k
n
n e
p k (1 p)nk
,
k
n!
n!
n e
p k (1 p)nk
(n k)! k!
n!
continues on next slide.
541/562
since n k.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
Conditional Distributions
Application: an imperfect particle counter
Now (making change of variables j = n k in the third line):
=
X
n=k
n!
n e
p k (1 p)nk
(n k)! k!
n!
( p)k X nk (1 p)nk
e
k!
(n k)!
k
j=0
( (1 p))j
j!
( p)
( p)k p
e e (1p) =
e
,
k!
k!
which is the p.m.f. of a Poisson( p) P
random variable.
i
* using exponential function exp(x) =
i=0 x /i!, with
x = (1 p).
542/562
( p)
e
k!
n=k
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
The Bivariate Normal Distribution
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
The Bivariate Normal Distribution
The Bivariate Normal Distribution
Suppose [X , Y ]> has a bivariate normal distribution, then its
density is given by:
1
1
p
fX ,Y (x, y ) =
exp
A ,
2 (1 2 )
2X Y 1 2
where
x X
y Y
x X 2
2
A=
X
X
Y
2
y Y
+
.
Y
543/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
The Bivariate Normal Distribution
The following results are important although quite tedious to show
(see section 5.10 of W+(7ed) for some of the derivation):
1. The marginals are: X N X , X2 and Y N Y , Y2 .
2. The conditional distributions are:
Y 2
, Y 1 2
(Y X = x ) N Y + (x X )
X
and
X 2
2
, 1
.
(X Y = y ) N X + (y Y )
Y X
3. The correlation coefficient between X and Y is: (X , Y ) = .
544/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Bivariate Case
The Bivariate Normal Distribution
Simulating multivariate normal distribution
Bivariate case: use properties 1 & 2 to simulate from i.i.d.
standard normal distributions:
X =X + X Z1
q
Y =Y + Y Z1 + Y (1 2 )Z2 ,
where Z1 and Z2 are i.i.d N(0, 1).
OPTIONAL: In case of multivariate normal, let
Z = [Z1 . . . Zn ]> i.i.d. N(0, 1), we have:
 The Cholesky decomposition: AA> = ( is the
variancecovariance matrix).
 We have: X = + AZ .
545/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Law of Iterated Expectations
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Law of Iterated Expectations
Law of Iterated Expectations
Note: E[X Y = y ] is a constant, but E[X Y ] is a random
variable.
For any two random variables X and Y , we have the law of
iterated expectations:
E [E [Y X ]] = E [Y ] .
To prove this in the continuous case, first consider:
Z
E [E [Y X ]] =
E [Y X = x ] fX (x) dx
Z Z
=
y fY X (y x ) dy fX (x) dx.
546/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Law of Iterated Expectations
Interchanging order of integration, we have
Z Z
E [E [Y X ]] =
y
fY X (y x ) fX (x) dx dy
{z
}

=fY (y )
y fY (y ) dy
=E [Y ]
* using the law of total probability (why can we use it here?).
547/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Conditional variance identity
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Conditional variance identity
Conditional variance identity
Another important result is the conditional variance identity:
Var (Y ) = Var (E [Y X ]) + E [Var (Y X )] .
Proof (* using the law of iterative expectations):
Var (Y ) =E Y 2 (E [Y ])2
=E E Y 2 X (E [E [Y X ]])2
h
i
=E E Y 2 X E (E [Y X ])2
h
i
+ E (E [Y X ])2 (E [E [Y X ]])2
=E [Var (Y X )] + Var (E [Y X ]).
Proof can also be found in section 5.11 of W+(7ed).
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ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Application & Exercise
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Application & Exercise
Application: Random Sums
An insurance company usually has uncertainty in both the
number of claims and the claim amount of each claim filled.
Denote the total claim size is S, individual claim size Xi and
N is the total number of claims.
We are interested in the (distribution) mean and variance of a
random sum defined as:
S = X1 + X2 + . . . + XN ,
where both the Xi s and N are random variables.
We assume all the Xi are independent and also independent of
N.
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ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Application & Exercise
Application: Random Sums
Mean of S: The mean of the aggregate claims is:
E [S] = E [Xi ] E [N] .
This is straightforward:
E [S] =E [E [S N ]]
" " N
##
X
=E E
Xi N
i=1
"
=E
N
X
#
E [Xi N]
i=1
=E [N E [Xi N]]
=E [E [Xi ]] E [N] = E [Xi ] E [N] .
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* using independence Xi and N.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Application & Exercise
Application: Random Sums
Variance of S: The variance of the aggregate claims is:
Var (S) = (E [Xi ])2 Var (N) + E [N] Var (Xi ) .
This is also straightforward to show:
Var (S) =E [Var (S N )] + Var (E [S N ])
"
!#
N
X
Xi
+ Var (E [Xi ] N)
=E Var
i=1
=E [N] E Var (Xi ) + E [Xi ] Var (N)
 {z }
 {z }
constant
constant
2
=E [N] Var (Xi ) + (E [Xi ]) Var (N)
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* using conditional variance identity, ** using independence
between Xi and N.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Application & Exercise
Application: Random Sums
Moment Generating Function of S: The m.g.f. of the
aggregate claims is given by:
MS (t) = MN (log (MX (t))) .
Finding the m.g.f. is also straightforward:
h i
h h ii
MS (t) =E e tS = E E e tS N
i
h
i
h
=E (MX (t))N = E e Nlog(MX (t))
=MN (log (MX (t))) .
Note that when the number of claims has a Poisson
distribution, the resulting total claims S is said to have a
Compound Poisson distribution.
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ACTL2002/ACTL5101 Probability and Statistics: Week 3
Laws
Application & Exercise
Exercise
Let X Gamma(, ) and Y X EXP(1/X ).
a. Question: Find E [Y ].
(Note: E [X ] = /, EXP()=Gamma(1,))
b. Question: Find Var (Y ). (Note: Var (X ) = / 2 )
a. Solution:
E [Y ] =E [E [Y X ]]
=E [X ] = /.
b. Solution:
Var (Y ) =Var (E [Y X ]) + E [Var (Y X )]
=Var (X ) + E X 2
=/ 2 + Var (X ) + (E [X ])2
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=/ 2 + / 2 + (/)2 = 2 + 2 / 2 .
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Multivariate Case
Introduction
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Multivariate Case
Introduction
The Multivariate Case
Let X = [X1 , X2 , . . . , Xn ]> be a random vector with n
elements. The joint distribution function (DF) of X is
denoted by:
FX1 ,X2 ,...,Xn (x1 , . . . , xn ) = Pr (X1 x1 , . . . , Xn xn ) .
In the discrete case, we define the joint probability mass
function as:
pX1 ,X2 ,...,Xn (x1 , . . . , xn ) = Pr (X1 = x1 , . . . , Xn = xn ) .
In the continuous case, we define the joint density function of
X as:
fX1 ,X2 ,...,Xn (x1 , . . . , xn ) =
554/562
...
FX ,X ,...,Xn (x1 , . . . , xn ) .
x1
xn 1 2
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Multivariate Case
Introduction
The joint DF is given by:
Z xn
Z
FX1 ,X2 ,...,Xn (x1 , . . . , xn ) =
...
x1
fX1 ,X2 ,...,Xn (z1 , . . . , zn ) dz1 . . . dzn .
To derive marginal p.m.f.s or densities, simply evaluate (sum
or integrate) overall the region except for the variable of
interest. For example in the continuous case, the marginal
density of Xk , for k = 1, 2, . . . , n is given by:
Z
Z
Y
fXk (xk ) =
...
fX1 ,X2 ,...,Xn (z1 , . . . , xk,. . . . , zn )
dzj .
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j6=k
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Multivariate Case
Introduction
Independent Random Variables
The random variables X1 , X2 , . . . , Xn are said to be
independent if their joint distribution function can be written
as the product of their marginal distribution functions:
FX1 ,X2 ,...,Xn (x1 , . . . , xn ) = FX1 (x1 ) . . . FXn (xn ) .
As a consequence, their joint density can also be written as:
fX1 ,X2 ,...,Xn (x1 , . . . , xn ) = fX1 (x1 ) . . . fXn (xn ) ,
in the continuous case and for the discrete case as:
pX1 ,X2 ,...,Xn (x1 , . . . , xn ) = pX1 (x1 ) . . . pXn (xn ) .
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ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Multivariate Case
Introduction
Also, we have (if independent):
E [X1 X2 . . . Xn ] = E [X1 ] E [X2 ] . . . E [Xn ] ,
and in general, (if independent) we have:
E [gX1 (X1 ) gX2 (X2 ) . . . gXn (Xn )] =E [gX1 (X1 )] E [gX2 (X2 )]
. . . E [gn (Xn )] .
557/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
The Multivariate Case
Introduction
If X1 and X2 are independent, then:
1. Cov [X1 , X2 ] = 0 and so (X1 , X2 ) = 0.
2. E [X1 X2 ] = E [X1 ] and of course E [X2 X1 ] = E [X2 ].
3. A very useful result about independence is that X1 , X2 , . . . , Xn
are independent if and only if we can write the joint
distribution as a product of functions that involve only each
random variable:
FX1 ,X2 ,...,Xn (x1 , . . . , xn ) = HX1 (x1 ) . . . HXn (xn )
for some functions HX1 , . . . , HXn .
558/562
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Summarizing data
Exercises
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Summarizing data
Exercises
Exercise: summarizing data
An insurer assumes that the time between claims is
exponential distributed. A reinsurer pays out when the insurer
has two or more claims within two years. The distribution of
interest is Gamma(2,3).
Questions: Find the
a.
b.
c.
d.
Median;
Range;
10% trimmed mean;
Inter quantile range.
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Sorted observations:
1.56 1.88 2.53 3.39
3.62 3.68 5.24 5.25
5.31 5.56 5.66 6.17
Solutions:
a.
b.
c.
d.
M = (3.68 + 5.24)/2 = 4.46;
R = 6.17 1.56 = 4.61;
x +...+x
e
x0.10 = (2) 10 (11) = 4.212;
Q1 = 2.53 + 0.75 (3.39 2.53) = 3.18
Q3 = 0.75 5.31 + 0.25 5.56 = 5.37
IQR = 5.37 3.18 = 2.19.
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Summarizing data
Exercises
E.c.d.f.
1
0.9
0.8
0.7
F (x)
0.6
0.5
0.4
0.3
Colored lines: E.c.d.f.
Black solid line: Gamma(2,3) c.d.f.
Black dashed lines: Gamma(2,3) c.d.f. 2
0.2
0.1
0
0
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10
15
Question: Is the Gamma(2,3) the correct distribution?
Solution: Yes.
20
25
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Summary
Summary
Joint & Multivariate Distributions
The Bivariate Case
Introduction
Exercises
Means, Variances, Covariances
Correlation coefficient
Conditional Distributions
The Bivariate Normal Distribution
Laws
Law of Iterated Expectations
Conditional variance identity
Application & Exercise
The Multivariate Case
Introduction
Summarizing data
Exercises
Summary
Summary
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Summary
Summary
Summary joint probabilities
Joint distribution function:
FX1 ,X2 (x1 , x2 ) = Pr (X1 x1 , X2 x2 ) .
Marginal p.m.f.:
pX1 (x1i ) =
pX1 ,X2 (x1i , x2j ) .
j=1
Marginal density function:
Z
fX1 (x1 ) =
fX1 ,X2 (x1 , z2 ) dz2 .
Conditional probability:
Pr (X = xi Y = yj ) =
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Pr (X = xi , Y = yj )
.
Pr (Y = yj )
ACTL2002/ACTL5101 Probability and Statistics: Week 3
Summary
Summary
Summary joint probabilities
Covariance:
Cov (X1 , X2 ) 12 = E [X1 X2 ] E [X1 ] E [X2 ] .
Correlation:
(X1 , X2 ) = p
Cov (X1 , X2 )
Var (X1 ) Var (X2 )
Law of iterative expectations:
E [E [Y X ]] = E [Y ] .
Conditional variance identity:
Var (Y ) = Var (E [Y X ]) + E [Var (Y X )] .
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