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Exam S

Raise Your Odds® with Adapt

PROBABILITY REVIEW
PROBABILITY REVIEW
PROBABILITY REVIEW
PROBABILITY REVIEW PARAMETER ESTIMATION
PARAMETER ESTIMATION
PARAMETER ESTIMATION PARAMETER ESTIMATION HYPOTHESIS TESTING
HYPOTHESIS TESTING
HYPOTHESIS TESTING HYPOTHESIS TESTING
Probability Functions
Probability Functions
Probability Functions Estimator Quality
Estimator Quality
Estimator Quality Hypothesis Testing
Hypothesis Testing
Hypothesis Testing
&& &
Bias Bias
Bias Type I error: Reject ??
Type I error: Reject ??
Type I error: Reject ?? ää even though ??
even though ??
ä even though ?? ää is true
is true
ä is true
???? ?????? ??=== ???? ?????? d?? ??d??d??
==Pr =PrPr ????≤ ??≤??≤?? ??
'('( '(
bias
biasbias
vv ?? v?? ??==E=E??E?? ?? −−?? −?? ?? Type II error: Accept ??
Type II error: Accept ??
Type II error: Accept ?? ää even though ??
even though ??
ä even though ?? RR is true
is true
R is true
???? ?????? ??==1=1−1 −??− ?? ?????? ??==Pr =PrPr ????> ??>??>?? ?? An estimator is asymptotically unbiased if the bias ????=
An estimator is asymptotically unbiased if the bias
An estimator is asymptotically unbiased if the bias ??=Pr
=PrPr Type I error
Type I error
Type I error==significance level =significance level
significance level
???? ?????? ?? of an estimator goes to 0 as the sample size goes to ????=
of an estimator goes to 0 as the sample size goes to
of an estimator goes to 0 as the sample size goes to ??=Pr
=PrPr Type II error
Type II error
Type II error
ℎℎ ??ℎ?? ??=== infinity.
infinity.
infinity. 11−1 −??− ??= ??=Pr(=Pr( Pr(Reject ??
Reject ??
Reject ?? ää?? ??RR is true
?? is true
R is true ==power =power
power
???? ?????? ?? ä
&& & Consistency
Consistency
Consistency ??-value: Probability of the observations if ??
??-value: Probability of the observations if ??
??-value: Probability of the observations if ?? ää is true
is true
ä is true
?????? ???? ??=== ℎℎ ??ℎ?? d?? ??d??d??
==− =−ln −ln??ln ; ;????;?????? ??==??=??'8
?? ?????? ?? '8'8
?? && & ?? is consistent if:
?? is consistent if:
?? is consistent if: Confidence Intervals and Sample Size
Confidence Intervals and Sample Size
Confidence Intervals and Sample Size
'( '( '( ?? ? ?? ?
lim
lim lim
PrPrPr????bb??−− If ??~??(??,
If ??~??(??,
If ??~??(??, ???? ) and ??
??) and ??
) and ?? is known, then the
is known, then the
is known, then the 11−1 −??−
?? %
??% %
Moments
Moments
Moments b ?? − ?? ??
<<??<?? ??==1 for all ??
=1 for all ??
1 for all ?? >>0 >0 0 ôô ô
b→(
b→( b→(
(( ( confidence interval for ?? is ??
confidence interval for ?? is ??
confidence interval for ?? is ?? ±±??± ??ó/? ??ó/? where
ó/? where
where
EE??E?? ?????? ??=== ???? ?????? ?????? ?????? ?? d??
d?? d?? •• Sufficient but not necessary for consistency:
•Sufficient but not necessary for consistency:
Sufficient but not necessary for consistency: bb b

bias
bias bias →→0 and Var
→0 and Var
0 and Var ???? ??→→0 as ??
→0 as ??
0 as ?? →→∞ →∞ ∞ Pr (??
Pr (??
Pr (?? <<??<??ó/? ??ó/?
ó/? ))== ) ??/2.
=??/2.
??/2.
'('( '(
kk th thk raw moment: ??
raw moment: ??
th raw moment: ?? == =
<<= =E=E??E??<<?? <
< Relative Efficiency
Relative Efficiency
Relative Efficiency Confidence Intervals for Means
Confidence Intervals for Means
Confidence Intervals for Means
?? ?
kk th thk central moment: ??
central moment: ??
th central moment: ?? = = E=E E?? ??− ??
− ??−?? << <
?? The relative efficiency of ??
The relative efficiency of ??
The relative efficiency of ?? χ χ χ distribution
distribution
distribution
<< < RR with respect to ??
with respect to ??
R with respect to ?? ?? ?
Variance: ??
Variance: ??
Variance: ?? ?? ?
==??=??????== ?E =E E????− ??
−??− ?? ???? = ?
=E=E??E??????− ?
−??− ???? ?? ? If ??
If ??
If ??===ûiüR û û ?? ?
????i i, ?? has a ??
??, ?? has a ?? ?? ?
i , ?? has a ?????? distribution. ?? distribution.
distribution.
Var
Var Var ????????? iüR iüR
???? ?? === For ??
For ??
For ??i ~??
i ~??i ~??
?? ?
??,??,????,
?? ??: : :
Coefficient of variation: ????
Coefficient of variation: ????
Coefficient of variation: ???? === VarVarVar ????RR??R
???? ?? •• • biüR b b
iüR iüR????i i??
−− i ??
− ?? ???? ?????????~?? ? ?? ?
~?? ~?????? ??
????SS??S Mean Square Error
Mean Square Error
Mean Square Error • • • bb b
???? ??
− − ??
− ?? ?? ? ?? ? ?? ?
?? ???? ~??
?? ~?? ~??????−?? −1− 1 1
Skewness: ??
Skewness: ??
Skewness: ?? = =
RR R SS S = ? ? ? ?? ? iüR
iüR iüRi i i
???? ?? MSE
MSE MSEvv ?? v?? ??==E=E E????−??−??− ?? ?? ==Var =Var Var ???? ??
+++bias bias biasvv ??v?? ?? Student’s t distribution
Student’s t distribution
Student’s t distribution
????VV??V
Kurtosis: ??
Kurtosis: ??
Kurtosis: ?? ??= =
? =VV V Uniformly Minimum Variance Unbiased Estimator ?? has a ?? distribution if ??
Uniformly Minimum Variance Unbiased Estimator
Uniformly Minimum Variance Unbiased Estimator ?? has a ?? distribution if ??
?? has a ?? distribution if ?? ==??=?? ?? ?? ???? ?? with
?? with
?? with
???? ?? ?? ?
Covariance: Cov
Covariance: Cov
Covariance: Cov ??,
??,????,?? ??==E=E E????− ??
−??− ??YY??Y????−?? −??−??ZZ??Z (UMVUE)
(UMVUE)
(UMVUE) ??~??(0,1) and ??~??
??~??(0,1) and ??~??
??~??(0,1) and ??~?? (??).
(??).
(??).
==E=E???? E???????? −−E− E??E??E??E??E?? ?? A UMVUE is an unbiased estimator that has the
A UMVUE is an unbiased estimator that has the
A UMVUE is an unbiased estimator that has the Testing the mean of a normal population
Testing the mean of a normal population
Testing the mean of a normal population
Cov
Cov Cov ??,??,??
??,
?? ?? lowest variance of any unbiased estimator
lowest variance of any unbiased estimator
lowest variance of any unbiased estimator For a sample of size ?? from a normal population,
For a sample of size ?? from a normal population,
For a sample of size ?? from a normal population,
Correlation coefficient: ??
Correlation coefficient: ??
Correlation coefficient: ?? YZYZYZ === regardless of the true value of the estimated
regardless of the true value of the estimated
regardless of the true value of the estimated the ?? statistic to test if the mean is ?? is:
the ?? statistic to test if the mean is ?? is:
the ?? statistic to test if the mean is ?? is:
????YY????ZYZ??Z
parameter.
parameter.
parameter. ????− −??−
?? ?? ??
Percentiles
Percentiles
Percentiles ????=??==
The 100p
The 100p
The 100p percentile, ??
percentile, ??
percentile, ?? Maximum Likelihood
Maximum Likelihood
Maximum Likelihood ???? ?? ???? ??
]], is the lowest point where
, is the lowest point where
] , is the lowest point where
thth th
Steps to Calculating MLE:
Steps to Calculating MLE:
Steps to Calculating MLE: ????
????????
==??=??−?? −1 −1 1
???? ??????]]??]≥≥??. If ?? is continuous, ??
≥??. If ?? is continuous, ??
??. If ?? is continuous, ?? ]] is a unique point
is a unique point
] is a unique point 1.1.??1.?? ?????? ??=== ???? ?????? ?? 3.3.Set ??
3.Set ?? == =
Set ?? ???? ??==0 =0 0
satisfying ??
satisfying ??
satisfying ?? ????]]??]==??. =??. ??. Testing the mean of a Bernoulli population
Testing the mean of a Bernoulli population
Testing the mean of a Bernoulli population
2.2.??2.?? ?????? ??==ln =ln??ln ?? ?????? ?? 4.4.Solve for ??
4.Solve for ??
Solve for ?? For a sample of size ?? from a Bernoulli population
For a sample of size ?? from a Bernoulli population
For a sample of size ?? from a Bernoulli population
Mode
Mode Mode The maximum likelihood estimate equals the
The maximum likelihood estimate equals the
The maximum likelihood estimate equals the with mean ??, the ?? statistic to test if ??
with mean ??, the ?? statistic to test if ??
with mean ??, the ?? statistic to test if ?? ==??=??ää is:
?? is:
ä is:
Mode is x that maximizes ??
Mode is x that maximizes ??
Mode is x that maximizes ?? ???? .
??. . method of moments estimate for:
method of moments estimate for:
method of moments estimate for: ???? ?? ????−??−??− ??ää??ä
Moment Generating Function
Moment Generating Function
Moment Generating Function •• •Binomial with fixed ??
Binomial with fixed ??
Binomial with fixed ?? ????=??==
????Y??Y ??Y?? = ??=E=E??E??aYaY ?? aY
•• •Poisson
Poisson
Poisson ????ää??1ä1−1 −??− ??ää??ä???? ??
????Y??
bb b
==E=E??E??bb??, where ??
b bb b ??: number of successes
??: number of successes
??: number of successes
Y Y00 0 , where ??
, where ?? is the n
is the n
is the n derivative
derivative
th derivative
thth
•• •Negative binomial with fixed ??
Negative binomial with fixed ??
Negative binomial with fixed ??
Conditional Probability
Conditional Probability
Conditional Probability Testing the difference of means from two
Testing the difference of means from two
Testing the difference of means from two
•• •Exponential
Exponential
Exponential
PrPr
Pr ????∩??∩??∩ ?? ?? populations
populations
populations
•• •Gamma with fixed ??
Gamma with fixed ??
Gamma with fixed ??
PrPrPr ????∣??∣????∣ ??===

•• •If the two populations ?? and ?? are normally
If the two populations ?? and ?? are normally
If the two populations ?? and ?? are normally
Pr PrPr ???? ?? •• •Normal
Normal
Normal
???? ??,
????,????,
?? ?? distributed with unknown variances that are
distributed with unknown variances that are
distributed with unknown variances that are
Variance of Maximum Likelihood Estimator
Variance of Maximum Likelihood Estimator
Variance of Maximum Likelihood Estimator
????
YY?? ??Y??∣??∣????∣ ??=== assumed to be equal, the test statistic is:
assumed to be equal, the test statistic is:
assumed to be equal, the test statistic is:
???? ?????? ?? Fisher information matrix
Fisher information matrix
Fisher information matrix
1.1.Two unpaired normal populations
1.Two unpaired normal populations
Two unpaired normal populations
Bayes’ Theorem
Bayes’ Theorem
Bayes’ Theorem ????????lnln ?
??ln
?? x;
??x;??x;
?? ?? ?????????? ?????;????;????;
?? ??
I I ????
I ??==−??E =−??E−??E ==−E =−E −E ????− −??−
?? ?? ??
PrPr
Pr ????∣??∣????∣ ?? PrPrPr ???? ?? d??
d??d??
?? ? d?? d??d??
? ? ? ????= ??== , where
, where
, where
PrPrPr ????∣??∣????∣ ??=== 11 1 11 1
PrPrPr ???? ?? Rao-Cramè
Rao-Cramè
Rao-Cramè rr lower bound for the variance
lower bound for the variance
r lower bound for the variance ???? ?? +++
???? ????YY??Y ????ZZ??Z
ZZ?? ??Z??∣??∣????∣ ??????
YY?? ??Y?? ?? of an estimator
of an estimator
of an estimator
????
YY?? ??Y??∣??∣????∣ ??=== 'R'R'R ????YY??−Y−1− 1 ??1??Y?Y???+Y+
?
+????ZZ??−−
Z1 −1 ??1??Z?Z???Z?
????
ZZ Z??
?? ?? ?? Var
Var Var ?? ?? ??= = =I I ?? ??
I ?? ?? ?
???? ??===
Law of Total Probability
Law of Total Probability
Law of Total Probability Sufficient Statistics
Sufficient Statistics
Sufficient Statistics ????YY??+Y+??+ ??ZZ??−−
Z2 −22
•• •Discrete
Discrete
Discrete ????
???? ????
= = ??
= ?? ??
+ + ??
+?? ??
−− 2
−2 2
•• •A statistic ?? is sufficient for a parameter ?? if the
A statistic ?? is sufficient for a parameter ?? if the
A statistic ?? is sufficient for a parameter ?? if the YY Y ZZ Z
2.2.Two paired normal populations
2.Two paired normal populations
Two paired normal populations
Pr PrPr ???? ??=== Pr PrPr ????∩?? ∩??∩ ??i i??= = = PrPr Pr?? ?? ??PrPr Pr
?? ??∣??
∣ ????
∣ ??
likelihood of the sample, given ??, does not
likelihood of the sample, given ??, does not
likelihood of the sample, given ??, does not
i ii i ii i ???? ??
ii i ii i
depend on the parameter:
depend on the parameter:
depend on the parameter: ????= ??== , where
, where
, where
•• •Continuous
Continuous
Continuous ???? ??
???? ,??

,
RR R bb b…,??
…?? ;??;?? ??;??
??
?? ??= = ℎ
= ℎ ??
ℎ?? ,??

, … ,
RR R bb b??…?? ?? ?? ?? ?? ???? ??
•• •A statistic ?? is sufficient for a parameter ?? if and
A statistic ?? is sufficient for a parameter ?? if and
A statistic ?? is sufficient for a parameter ?? if and ???? ??
i i i i i i i i i
= = ??
= ?? −
??− ??
−?? ??

Pr PrPr ???? ??=== Pr PrPr ???? ?????? ?????? ?????? ?? d?? d?? d?? only if the following factorization is possible:
only if the following factorization is possible:
only if the following factorization is possible: ????= ??=sample mean of the ??
=sample mean of the ??
sample mean of the ?? i s
i s i s

Conditional Expectation Formula
Conditional Expectation Formula
Conditional Expectation Formula ???? ??????RR,??…
, R…,??…
??bb;??;??b??; ??==?? =?? ?????? ??⋅ ⋅ℎℎ⋅ ??ℎ??RR,??…
, R…,??…
??bb?? b ????=??=sample standard deviation of the ??
=sample standard deviation of the ??
sample standard deviation of the ?? i s
i s
i s

EEYYE??Y?? ??==E=EZZEEZEYYE??Y??∣??∣????∣ ?? • • Rao-Blackwell Theorem: For an unbiased
• Rao-Blackwell Theorem: For an unbiased
Rao-Blackwell Theorem: For an unbiased ????
????????
= = ??
= ??− ??
− 1
− 1 1
Variances
Variances
Variances estimator ?? and a sufficient statistic ??, ??
estimator ?? and a sufficient statistic ??, ??
estimator ?? and a sufficient statistic ??, ?? ?? is is •• •For Bernoulli data for two samples, the ??
?????????? is For Bernoulli data for two samples, the ??
For Bernoulli data for two samples, the ??
an unbiased estimator with variance that is less
an unbiased estimator with variance that is less
an unbiased estimator with variance that is less statistic to test for the difference of means of
statistic to test for the difference of means of
statistic to test for the difference of means of
•• •Variance of the Sample Mean
Variance of the Sample Mean
Variance of the Sample Mean
than or equal to ??????
than or equal to ??????
than or equal to ?????? ???? . ??. . two populations with ??
two populations with ??
two populations with ?? YY and ??
and ??
Y and ?? ZZ successes
successes
Z successes
For ?? independent and identically distributed
For ?? independent and identically distributed
For ?? independent and identically distributed
respectively is:
respectively is:
respectively is:
(i.i.d.) random variables, the variance of the
(i.i.d.) random variables, the variance of the
(i.i.d.) random variables, the variance of the The maximum likelihood estimator is a function of
The maximum likelihood estimator is a function of
The maximum likelihood estimator is a function of ????YY??Y ????ZZ??Z
lmn lmn lmn
YY Y a sufficient statistic.
a sufficient statistic.
a sufficient statistic. −−−
sample mean is Var
sample mean is Var
sample mean is Var ???? ??=== . . . ????YY??Y ????ZZ??Z
bb b
????=??
= = , where
, where
, where
•• •Bernoulli Shortcut
Bernoulli Shortcut
Bernoulli Shortcut 11 1 11 1
???? 1??1−1 −??− ?? ?? +++
?? probability
?? probability
?? probability ==??
=??
?? ????YY??Y ????ZZ??Z
????= ??== ????YY??+Y+??+ ??ZZ??Z
?? probability
?? probability
?? probability ==1=1−1 −??− ?? ?? ????=??=overall sample mean
=overall sample mean
overall sample mean ===
Var Var Var ???? ??===????−?? −??− ?? ?????????1??1−1 −??− ?? ?? ????YY??+Y+??+ ??ZZ??Z
•• •Conditional Variance Formula
Conditional Variance Formula
Conditional Variance Formula
Var VarVarYY ?? Y?? ?? ==Var =Var VarZZ E ZEYYE?? Y??∣?? ∣????∣ ??++E+ EZZEVar ZVar Var
YY ??
Y??∣?? ∣????∣ ??

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Wilcoxon Tests b iüR ??i ??i − ?????? Signed Rank Test = 2. k-th order statistic is • Poisson/Gamma is the coefficient of ?? ªa in biüR 1 + ?? ia . ??R ~?? ? (??R ) and ??? ~?? ? ??? . where ?? ? ?? ?? − 1 . b 2. ??? ??? + 1 ??~Binomial ??. b other level ?? tests. iüR of the observations under ??ä . Calculate the maximum likelihood as a function b ? b ? of the observations under ??R . the fitted ??∗ = ?? + ???? distribution puts too little weight in that Posterior Gamma ?? = ?? + ?? For the normal approximation. ∞ <'b/? For the normal approximation. For large sample sizes. If ??~Poisson Λ . where < ??i − ????i ? < ??i? Order Statistics æ∑û ¡¬ ??<'R = = − ?? ??R + ??? + 1 The density function of the ?? ≥¥ order statistic is: E ??R = ??R ????i ????i ??! 2 iüR iüR <'R b'< ??Zµ ?? = ?? ?? 1 − ??Y ?? ??Y (??) ??R + ??? + 1 ???? = ?? − 1 ?? − 1 ! ?? − ?? ! Y Var ??R = ??R ??? ?? = number of groups ≥¥ The expected value of the ?? order statistic from a 12 When testing equality of distributions in two sample of ?? from a uniform distribution on 0. Determine the ??-value using ??R ??? 3. subtract ??ä from each sample item iüR ??i − ???? ? iüR ??i − ???? ? 3. ?? is The Mann-Whitney ?? statistic is the sum of the dimensions. ??R : ?? < ??ä . iüR ??i − ?? ??i − ?? calculate the statistic ?? = <'b/? .coachingactuaries. ???? = ?? − 1 (?? − 1) where ?? is the ∑< counts of the number of items in the first sample . ??i . There Sign Test should be ??? terms in the sum. The Wilcoxon signed rank statistic. treat it as a ranks of the second sample to get ??? . The fit is good if Zero-one ??R : ?? > ??ä . If there are ties. differences ??i = ??i − ??i . calculate b ??i − ?? ??i − ?? iüR second expression is below a constant k. number of rows and ?? is the number of columns. b ? b ? BAYESIAN ESTIMATION iüR ??i − ???? ? iüR ??i − ???? ? BAYESIAN ESTIMATION b ? Bayesian Estimation Null and Alternate 6 iüR ??i − ??i Test ??-value =1− if there are no ties Bayesian Hypotheses ?? ??? − 1 Type of Loss ?? ??. 2 1 − ?? ?? − ?? Squared-error ?? − ?? ? sided ??R : ?? ≠ ??ä . b ??i − ?? ? b ??i − ?? ? iüR iüR when ??ä and ??R are both simple. the statistic ?? = . or ??∫ ?? . In either case: ?? = • This method reduces to Neyman-Pearson 1. series of m Bernoulli’s. ??R = ??? . The relationship between ??R and ??? is ??R + ??? ??R + ??? + 1 ??? = − ??R 2 www. ??R < ??? posterior sided ??ä : ?? ≤ ??ä . ??R ≥ ??? ?? ?? − 1 2 Median of ?? qq-Plot Absolute ?? − ?? One. 0. evaluate ?? = interval. Sum the When the model is binomial ??. All Rights Reserved. ??R > ??? 1 if ?? ≠ ?? posterior The probability under the aforementioned null the point-connected line is close to the 45° line. The critical region is the set of observations for ??i : ??i = ??i − ??.Chi Square Tests NONPARAMETRIC METHODS FOR NONPARAMETRIC METHODS FOR HYPOTHESIS For the normal approximation. assign the average of the ranks to the tied group. ?? . ?? . To test ?? = ??ä . is the iüR ??i ??i − ?????? = sum of ranks of positive ??i . • If the line is steeper than 45°. where æ∑û ∫ If ??~Normal Θ. ??? ) random variable is defined by the normal distribution. calculate Rank Correlation Coefficients A level ?? test is uniformly most powerful if its the differences ??i = ??i − ??i . Calculate the maximum likelihood as a function value using the normal distribution. evaluate ?? = The chi-square test statistic is: TESTING HYPOTHESIS TESTING Φ ¬ ¡ 'Ω ¡¬ . where ??~ ?? ? ?? − 1 . ??. the Wilcoxon rank sum statistic. ?? . and ??~Beta ??. ?? : and ??? have the same distribution. ?? Estimate. ?? ? ?? − 1 ??R'ó ? . Determine the ??. 2 ??R + ??? + 1 ??R ??R ??? ??? . 2 . ?? ? ?? − 1 ??R'ó . ∗ ∫'Ω ∫ • Normal/Normal Φ . For large sample sizes. ?? ? ?? − 1 ??ó 2 after subtraction. and Λ~Gamma ??. has the distribution sample of size ?? is equal to Pr ?? ≤ ?? < ?? .com Copyright © 2016 Coaching Actuaries. ?? : ?? ?? + 1 ???? + ?????? E ?? = ??∗ = 4 Posterior Normal ?? + ???? ?? ?? + 1 2?? + 1 ???? Var ?? = ??∗ = 24 ?? + ???? Rank Sum Test • Bernoulli/Beta To test if two populations with samples of sizes ??R If ??~Bernoulli ?? . Confidence Intervals for Variances The confidence level that the 100pth percentile is The relationship between ?? and the rank-sum • The unbiased sample variance from a normal between the ?? th and ??th order statistics from a statistic is population.e. ??R ≤ ??? Let x-coordinates be the fitted values and y- 0 if ?? = ?? Mode of 1 − ?? coordinates be the observed data. ?? = ??? − • Confidence intervals for the variances at the 2 To test if the median is equal to ??. ?? Two. and Θ~Normal ??. ?? ? . Conjugate Priors hypotheses that the statistic ?? equals ??. ??ä : ?? = ??ä . vice versa. calculate 2. sum the ranks ?? ∗ = ?? + ?? of the first sample within the combined sample to Posterior Beta ∗ ?? = ?? + ?? − ?? get ??R . ?? = Likelihood Ratio Tests b/? b ? b ?? i − ?? ?? iüR i − ?? ? 1. • With n data points. ?? = 1/?? : 2b . To test if means of two samples of Spearman’s ?? which the ratio of the first expression over the paired data are equal. divided by considered ?? ?? + 1 »≥ quantile. To test if two populations have the same median Var ?? = ??R ??? Uniformly Most Powerful Critical Regions 12 based on ?? pairs of sample data ??i . Calculate the ranks of ??i . i. ??R = ??? Kendall’s ?? Mean of min 2??. Let ?? be the number of power is greater than or equal to the power of all Pearson’s correlation coefficient positive differences. ?? ? ?? − 1 ??ó ? b/? E ?? = An ??(??R . b∏R less than each item in the second sample. subtract ?? from ??R ??R + 1 100 1 − ?? % confidence interval are: each sample item to produce ?? positive numbers = ??R ??? + − ??R 1. ??R ≠ ??? ?? = posterior ??ä : ?? ≥ ??ä .

??iÀ= ?? = ??i< ??<À ?? − ??i ??iÀ ?? Time In Transient States • A mixture of Poisson random variables is not a <‡i Expected time in transient states Poisson random variable. ?? Minimal Path Set ?? ??. defined by ??iÀ = ??i ??iÀ . Given two Poisson processes with rate ??R and ??? : . ?? + ?? − 1 i <∏€'R'i M/M/1 ?? ?? ?? 1 − ?? Recurrent state: Probability of reentering the state ?? ????. to state j. ??i : The rate at which the process transitions from ??iÀa = à a'à ??i< ??i<À ?? '◊ ??b state i. ??À ??ä . reaches state ?? + 1 ?? ??< = + µ ?? ??<'R ◊µ ◊µ Classification Of States • They are independent of any other events • For M/M/1 queuing system: Absorbing: Cannot be exited. A continuous Markov chain in which the states are 1 E ??À = nonnegative integers and the only transitions ?? Thinning possible are ?? → ?? + 1 ??< and ?? → ?? − 1 ??< . 1 ≤ ?? < ?? iü< is 1. <∏€'R Yule ???? 0 Irreducible chain: Only one class exists. given that it transitions. ?? ≠ 1 parameter ??R + ??? and secondary distribution a iüR Var ??b = 1 − ?? ? mixture with weight ??R ??R + ??? on ??R and the ???? . Var ?? ?? = ????E[?? ? ] ??< b E ??b = ?? b The sum of compound Poisson processes ??R . ?? with ??ÀÀ ?? = ?? and ?? = ??. ??R ??i'R and ??? . ?? = min . ?? = 1 ??. the number of events over a time period ℎ is a ??iÀ : The instantaneous transition rate from state i Õ ??À = û Œ 'R . ?? ≤ 1 ( Structures ??ä = À ?? ?? is the structure function for a system. where ?? = ?? ??. ?? ≠ ?? E ??< = ?? − ?? Two states communicate: each state is accessible • The probability that the next event is from the ?? + 1 ◊¬ .<∏R ?? = ?? '◊µ a − ?? '◊µfl¬ a • A linear combination of Poisson random ??<∏R − ??< ??i = ??Ài ??À . ?? = ?? from the other. Minimal Cut Set A set of components for which the system fails if all fail but does if at least one of the components functions. ??? is a compound Poisson process with ??b = ??ä ?? b'R − ?? ?b'R ??i ?? ? .coachingactuaries. Poisson random variable with mean ??ℎ. All Rights Reserved. 1 1 ??(??) and probability function ??(??) for a certain Var ??À = • Expected time to stay in state ?? = 1 ??< + ??< ?? 1 − ?? type of an event: • Expected time starting in state k until process iüR • That type of event follows a Poisson process R fi Both E ??À and Var ??À approach ln j as ?? → ∞. œ û 'R intensity function ??(??). the number of events Algorithmic Efficiency between times ℎ and ℎ + ?? is a Poisson random Birth and Death Processes À'R ÿ∏Ÿ variable with mean ÿ ??(??) d??. <üR ??b = ??iÀ : The probability that the process transitions to ??! Gambler’s Ruin Probabilities In a homogeneous Poisson process with parameter state j from state i. an absorbing state Poisson ?? 0 occur before l events from process 2 is is a class by itself. DISCRETE MARKOV CHAINS DISCRETE MARKOV CHAINS THE POISSON PROCESS THE POISSON PROCESS CONTINUOUS MARKOV CHAINS CONTINUOUS MARKOV CHAINS Chapman-Kolmogorov Equations Probabilities of Events Notations b For a Poisson random variable with mean ??. ?? = 1 balance on ??? . A finite Markov chain must have at least one M/M/s ?? where ?? = ??R ??R + ??? . www. Sums and Mixtures Limiting Probabilities Transient state: A non-recurrent state. Homogeneous Poisson Processes Characteristics 1 − ?? ?? <∏R Accessible from state i to j: ??iÀb > 0 for some n. Reverse-Time Markov Chain Series System Q is the reverse-time Markov chain for ergodic P if ?? ?? = biüR ??i and only if ??i ??iÀ = ??À ??Ài . . raw moments of the Kolmogorov’s forward equations ?? = ?? − ??’ 'R mixture are weighted averages of individual raw moments. iüR Given a Poisson process with intensity function À'i • Rate of leaving state ?? = ??< + ??< .À • A gamma ??.com Copyright © 2016 Coaching Actuaries. 3 . ?? mixture of Poisson random ??iÀ = Balance equations variables is a negative binomial ??. RELIABILITY RELIABILITY 1. ?? > 1 • ?? ?? = 1 if the system functions Àüä • ?? ?? = 0 otherwise. ??iÀ= ?? = ??i< ?? ??<À − ??iÀ ?? ??À Probability of ever transitioning from state i to j <‡i ??iÀ − ??i. • Sum of independent Poisson random variables Transition probabilities for pure birth processes Long-Run Proportions is a Poisson random variable. with intensity ?? ?? ??(??). first process is ?? ◊¬ ∏◊⁄ Class of states: A maximal set of states that Processes ??< ??< • The probability that k events from process 1 communicate with each other.1 A set of components for which the system ?? ?? ?? ??. ?? ≤ ?? recurrent class. ??< b b ??<. À . ?? functions if all are functioning but not if one of the components does not. ?? ≠ 1 In a non-homogeneous Poisson process with Relationship: bÀüR ??iÀ = ??i . ??i = 1 variables is not a Poisson random variable Kolmogorov’s backward equations ÀüR iüR unless all the ??R are positive numbers. ????. ??< ??<À = ??À ??À For a 2-transient-state (1 and 2) Markov chain: Compound Poisson Processes <‡i ??R? Õ General limiting probabilities for birth and death ??R? = 1 − ??RR ?? = ??i processes 1 Branching Processes iüR ??ä = A type of Markov chain representing the growth or E ?? ?? = ????E ?? ?? 1 + iüR i<üR <'R ( extinction of a population. Parallel System Monte Carlo Methods ?? ?? = max ??i = 1 − biüR 1 − ??i ?? ?? ?? ??.

??& = ?? < < ??& = 1 + ????& ??&∏R = 1 − ?? ?? ≥ 1 − ??€ − 1 − ??€ ?? • ??∗ = ?? = ???? 'R ?? = ???? <üä i €∈Ë iÁÀ €∈Ë ∪ËŒ ??& 1 Measures of Fit ?? = = − ?? ??: Number of parameters (not includes constant) 1 − ?? ?? ≤ 1 − ??€ − 1 − ??€ ??& ??& Error Sum of Squares (SSE) i €∈Ë iÁÀ €∈Ë ∪ËŒ ? SSE = Õ iüR ??i − ??i and has df = ?? − ?? + 1 . Survival Model ??i = ??ä + ??R ??i + ??i . time to The proportion of the sum of squares explained by Ross used ?? ?? for survival function instead of settlement of claim. Using minimal cut sets: ??& = ?? <∏R < ??& ??&∏< = ????& + ????& ??&∏R • ?? = ?? = ?? 'R ?? = ?? 1 − ?? ?? ≤ 1 − ??€ <üä • ?? = ???? ( i €∈Ë 1 − ??& For a weighted least squares model. Test the significance of additional variables Data Issues SSE¡ − SSEˇ¡ ?? Decreasing Failure Rate Distribution (DFR) ??˛. Bounds Using Intersections Response: the variable we are trying to predict Total Sum of Squares (SST) È Ÿ Explanatory Variables: variables used to predict SST = Õ ? iüR ??i − ??i = SSE + SSR and has df = 1− 1 − ??€ ≤ ?? ?? ≤ 1 − 1− ??€ response ?? − 1 . By using the ??ä ?? ?? ≤ ??€ − ??€ + ??€ <üR and ??R solved above. ?? ?? . then ?? ?? is ??&∏R = ??& − ??& • ??ä = ?? − ??R ?? the same polynomial of the ??i s. ?? ?? is the reliability function for a system.Z SST SST rate function ℎ ?? .coachingactuaries. ?????? ??i = ?? ? Normality: ??i is normally distributed Linearity: dependent variables are linearly related to coefficients of the model No correlation: ??i are uncorrelated www.Probabilities LIFE CONTINGENCIES LIFE CONTINGENCIES For a single variable classic linear model.com Copyright © 2016 Coaching Actuaries. Multiple claims from a single IFRA. gender. It results in under. F Statistic Hazard Function qq-plot and pp-plot: Assess the reasonability of the Test the significance of entire regression. but don’t ? Increasing Failure On The Average (IFRA) ??ˇ¡ − ??¡? ?? know their amounts. iüR iÀ À Length bias: The counterpart of censoring: less aggressive claims are not detected. • If ?? ?? is a polynomial of the ??i s. biüR ??i = 0. ? 1 − ??ˇ¡ ?? − ?? + 1 representation of large claims. Exposure Differences: Factors that may affect ??˚?Œ = ? = ? ??&Œ ?? − 1 b ?? − ?? exposures must be taken into account. ??&∏b • ??R =  & '& Ú 'Ú ŸÛ = ??&Ú b ??& = = Ó ??& ∙ b'Ó ??&∏Ó & '& ⁄ ŸÙ Inclusion/Exclusion bounds ??& Using minimal path sets: ??& − ??&∏b ??&Ú is the sample covariance of x and y b ??& = 1 − b ??& = ??& .Z ∶ correlation coefficient of ?? and ?? ( E System Life = ?? ?? ?? ???? Graph Types Standard Error of the Regression (??) ä Scatter Plot: Examine a continuous variable (?? axis) ?? = SSE ?? − ?? + 1 • For k-out-of-n systems whose components have as an explanation of another continuous variable (?? ??˚?Œ = ???? ? identical distribution ?? ?? ∼ exp ?? . + 1 − ??€ CLASSICAL LINEAR MODEL CLASSICAL LINEAR MODEL Regression Sum of Squares (SSR) ? iÁÀÁ< €∈Ë ∪ËŒ ∪˵ Variables SSR = Õ iüR ??i − ??i and has df = ??. ??Ú are the sample standard deviations of x ?? ?? ≤ ??€ ??& and y. the regression. iü< rectangle above each category. Count variables: number of claims ??Y. ?? ? = =1− = ??Y. i €∈‰Â iÁÀ €∈‰Â ∪‰Œ ??& = E ??& = < ??& • ??i = ??i − ??i is called the residual. which results in over-representation of large claims. = Λ ?? /?? is a non-decreasing function of t. axis). he also used the terminology failure rate Categorical variables: Bernoulli variables (yes/no). 4 . iüR €∈Ë iüR €∈‰Â Three Types of Variables (and examples) Coefficient of Determination (?? ? ) Time to Failure Continuous variables: claim amount. Contingent Payments i €∈‰Â iÁÀ €∈‰Â ∪‰Œ iÁÀÁ< €∈‰Â ∪‰Œ ∪‰µ ( For a multiple variables classic linear model. SSR SSE ? function ?? ?? instead of commonly known hazard auto usage. SSR ?? ?? − ?? + 1 ?? ? Runoff Triangles: Present the development of ??]. SSEˇ¡ ?? − ?? + 1 claims above or below a certain number. b ??: ?? ≥¥ diagonal element of ??′?? 'R 1 Box Plot: Examine a categorical variable as an ?? ?? ?? = ?? t Statistic ?? explanation of a continuous variable with a Test the significance of estimator ??À = ?? ∗ . i €∈‰Â E ??&∏b ??& = ?? = ?? ∙ b??& ?????? ??&∏b ??& = ?? = ?? ∙ b??& b ??& • ??ä and ??R are the least squares estimates of ??ä ?? ?? ≥ ??€ − ??€ ( and ??R .b' ]∏R = = ä SSE ?? − ?? + 1 ?? 1 − ?? ? Increasing Failure Rate Distribution (IFR) claims which may take years to resolve. ?? ? VIFÀ ?? ? VIFÀ accident. correlated. Eg. Failure Rate Function Frequency table and Mosaic plot: Examine a ??À − ?? ∗ ?? ?? ??b' ]∏R = ?? ?? = categorical variable as an explanation of a ??˚Œ ?? ?? categorical variable. • The monotone system’s lifetime distribution Variance Inflation Factor (VIF) Lack of Independence: Multiple exposures are is IFRA if the lifetime of all components are Test collinearity of variable j.b' ]∏R = Censoring: Have information on the number of ?? ?? is a decreasing function of t. a Λ ?? = ?? ?? d?? distribution assumption in GLM. ?? ?? is a non-decreasing function of t. Estimating Parameters Assumptions of classical linear models Homoscedasticity: ?? ??i = 0. All Rights Reserved.

] • The linear expression Àüä ??À ??iÀ is equal to a The model that each ?? is matched perfectly.Model Selection/Comparison GENERALIZED LINEAR MODEL (GLM) GENERALIZED LINEAR MODEL (GLM) Measures of Fit F statistic can be used to compare a model with a Generalized linear model extends the classical ??i satisfies ?? ??i = ??i . Gauss. ℎ ??i ?? ??i Sum of Squared Prediction Errors (SSPE) 'R 2. b 3.com Copyright © 2016 Coaching Actuaries. Exponential Family b ??i ??i − ??i − ?? ??i + ?? ??i Log-likelihood ???? − ?? ?? ?? = 2 ?? ?? = ?? ??. Var ??i = 1 − ℎii ?? ? Inv.coachingactuaries. ln − ln 1 − ?? v 1 Wald Test 1 + ???? ?? 1 ??i − ?? ? ???? − ?? ′ ???? ?? = ???? 'R ?? = 'R ???? − ?? ℎii = + Normal ?? 1 2 ?? ? ?? ? ? ˚Œ⁄ ?? b ?? − ?? Gamma 1 −ln −?? 1 Wald statistic reduces to for testing a single ÀüR À − (1 Œ Estimated Variance of Residuals ?? ?? coefficient ??À = 0. • The response variable does not need to be Adjusted ?? ? ??∑? normal. If ?? are SSE ?? − ?? + 1 ?? ? function of the mean of the response variable. of ??i − ??i . How To Generate ?? leverage points into a single measurement. set of variables to another model with a subset of linear model in two ways: ??i satisfies ?? ??i = ??i . ?? ?? = ?? = ??. 1 − −2?? ?? ? Deviance Residuals − Studentized/Standardized Residuals 2?? ? Test whether specific data points are unusual. 1 2?? ? Power Use GLM and utilize gamma or inverse Gaussian in Estimation: Fisher Scoring the exponential family with a log link. ??∑? = 1 − = 1 − ? SST ?? − 1 ??Ú ?? ?? . SSPE/PRESS ???? ??i d?? Neg. Gauss. 5 . where ℎ ?? = ?? ?? 'R S . Normal ?? Identity Models for Continuous Responses Gamma 1 ?? Power Method Inv. ??. Saturated Model The higher. the better. Generate ?? randomly from the parameters of Models for Counts iüb¬ ∏R the response distribution. SSPE = ??i − ??i ? 4.5??ln 2?? − E ?? = ?? ?? = ?? • In SAS. ? Given estimated coefficients ?? and a set of values Anscombe Residuals b ÀüR ??À − ??À i ℎii for the ?? variables in a GLM: ℎ ??i − ℎ ??i ??i = = ??i∗ ? ∙ ] ?? + 1 ?? ? ?? + 1 1 − ℎii 1. Var ?? = ???? ?? the deviance. the fitted betas for this model. ?? exp ?? ?? − ?? + 1 ?? ? ?? iüR ?? ?? = −??ln ?? − 0. ???? is called 2?? ? • In practice. ??i∗ = ??i ?? 1 − ℎii Estimation 2 ??i ??i − ??i − ?? ??i + ?? ??i Outlier: A point with unusually high residuals ] Link: ?? ?? = Àüä ??À ??iÀ ??i = High-leverage points: Diagonal elements ℎii that ?? Canonical Link: The ?? for which ?? ?? = ?? or a are more than 2 or 3 times the average value. ?? is called scaled deviance. Apply ?? to the result to obtain ??. Bin. Let ?? be the diagonal matrix with entries 'R Tweedie Distribution ?? ??i ? ?? ??i and ?? be the diagonal matrix with A compound distribution with Poisson claim entries ?? ??i . • The sign on the square root is taken as the sign constant multiple of ??. Quasi-likelihood Predicted Residual Sum of Squares (PRESS) Used for model that otherwise would be modeled b b ??i ? Canonical link using Poisson or negative binomial distributions ? Response Link name PRESS = ??i − ?? i = ?? ?? but its variance is greater than mean. the better. Generate ?? ?? = Àüä ??À ??iÀ . that same set of variables. Leverage: ℎii ???? 1 Leverage in 1-variable Regression Neg. Poisson ln?? Log ?? ?? = The lower SSPE/PRESS is. Calculate ?? given the fact ?? ?? = ??. counts and gamma claim sizes. ?? ? would be estimated by ?? ? . ln ???? 1 + ???? iüR value has no absolute meaning. All Rights Reserved. Deviance ??Ú? : Sample variance of ??i . ?? ' ???? Ú'fi • Has a point mass at 0 Score Vector: ( • Continuous on positive numbers ?? ' ???? • A member of exponential family Information Matrix: ( • Var ?? = ???? ] with 1 < ?? < 2 Iterative Formula Binary Responses ??< = ??<'R + ?? = ???? 'R ?? = ???? ?? − ?? Logit link (canonical) Local Dependent Variable ?? ?? = ???? + ?? ?? − ?? ?? ?? = ln 1 − ?? Iterative Formula in Iterative Weighted Least Probit link Squares ?? ?? = Φ'R ?? ??<∏R = ?? = ???? 'R ?? = ???? Complementary log-log link ?? ?? = ln −ln 1 − ?? www. Bin. V ?? = ?? ?? Likelihood Ratio Test Akaike Information Criterion Common exponential family distributions AIC = −2?? + 2?? Likelihood ratio statistic = 2 ?? − ?? Bayesian Information Criterion ?? ?? ?? ?? ??: Log-likelihood of the unconstrained model BIC = −2?? + ??ln(??) ln $ v ??: Log-likelihood of the constrained model Binomial ??ln 1 + ?? 1 Where ?? = ?? + 2 in a linear model R'$ • Likelihood ratio statistic follows a chi-square Model Validation Poisson ln?? v ?? 1 with q degrees of freedom to test significance. Cook’s distance: Combines outliers and high. instead of the mean ?? itself. 1 − ℎii iüR iüR Binomial ln ?? ?? − ?? Logit (?? = 1) b ??i − ??i d??i SSPE and PRESS are both used to compare models.

Random Walks ARMA ??. Depends on whether data are grouped Sample acvf + ⋯ b'< Chi-square 1 + ??] ??a'] − ?? + ??a Not reliable. ?? ??< = ??ª? ??i ??i∏< three links for binary responses. SARIMA (or ARIMA(p. ?? = ??i'R . It becomes an IMA(d. 1 − ?? ? Cross-correlation of time series (cvf) ??< = ?? < Sensitivity: Relative frequency of predicting an ??< ??. and then use cumulative versions of the ??ä ??. ˛'< <üR ??< • ??R = ??R iüä ??i ??i∏< ??< = ˛ . ?? = Moving Average Models event when it occurs. iüR ??< = Equations for stationary AR(1) processes ROC curve and AUC ??ä Cross-covariance of time series (ccvf) ??< = 0 A Receiver Operating Characteristic (ROC) curve ??< ??. ??. • ?? ?? = 0 Equations for ARMA(1. ??< = 0. build relative odds models 1. Q)) An ARIMA model which incorporates seasonal effects by differencing the series with lag s Copyright © 2016 Coaching Actuaries. ARIMA Lag: The distance between terms ARIMA ??. ??i . . with itself. ?? = 1. ?? > 0 ARMA $Œ ln $ = ?? = ??À . ?? > 0 0. Resale All Rights or distribution Reserved. ⋯ . White Noise iüä Alternate option: use continuation ratio A stationary times series in which each term is Autocorrelation ??À independent and has mean 0 and constant 1. D.coachingactuaries. ?? ??ä ??. ?? = ?? ??a∏< − ??& ??a − ?? ?? < ??ª? plots sensitivity (y) against the complement ??< = of specificity (x). d) with no moving vary with t. 1 ≤ ?? ≤ ?? Nominal Responses ?? ? . ?? = 0 iüä ??i ? Set ??û to the probability of base levels. the correlogram will decrease 1 − ?? ? Ergodic: The mean of the observed time series slowly from 1 to 0. the correlogram will ?? <'R ?? + ?? 1 + ???? approaches the theoretical mean as time goes ??< = always decrease.Three Goodness of Fit Measures for Logistic Autocovariance (acvf) Autoregressive Models Deviance ??< = ?? ??a − ?? ??a∏< − ?? Assume the time series have a mean of 0: Not a good measure. ?? = 0 ??À = À variance ?? ? . Not approximately chi-square ?? AR ?? = ??a − ?? = ??R ??a'R − ?? + ??? ??a'? − ?? iii. ?? aüR ? ˛ ? = ??ª iüä ??i Ordinal Responses Sample cvf ??< ??. 1) processes The study of time series tries to find relationships • ?? ? ?? = ????ª? = ??< ?? 1 + 2???? + ?? ? between the values of the series in order to ⁄ aô5 R ??ä = ??ª? forecast future values. Autocorrelation: The correlation of a times series ??< = ????<'R for ?? ≥ 2. q)(P. 6 is prohibited. ?? = 0 ARMA/ARIMA/SARIMA Models (odds of class j relative to base level). ??& ??Ú MA ?? = ??a = ??a + ??R ??a'R + ⋯ + ??˛ ??a'˛ Specificity: Relative frequency of predicting a Sample ccvf • Mean = 0 non-event when an event does not occur. ?? ??< ??. average terms.com Copyright Personal © 2016 copies Coaching permitted. Does not directly depend on data ??< If the mean is not 0: ??< = ? ii.5 if the ROC is the 45-degree line. ??< = ??a − ?? ??a∏< − ?? b ?? Alternate Expression aüR ??i − ??i ? Sample acf ??a = ??] ?? ??a . q) model with no autoregressive terms. • ??< ?? = = 1 − ?? ? ⁄ ⁄ R∏</a aô5 a∏< ô5 1 + ???? Correlation ??< = ??ª? ?? + ?? ?? <'R For higher t. b'< Area Under the Curve (AUC) is 1 for a perfect 1 • Always Stationary ??< ??. where ??] is the characteristic ?? = ??i 1 − ??i ??< polynomial. 1 + 2???? + ?? ? to infinity. ?? > ?? other ?? − 1 levels. ?? = ??a − ?? ??a − ?? • Var ??a = Var ??a + iüR ??i? Var ??a'i ˛ fit and 0. ?? Autocovariance Model cumulative distribution by creating bands ˛'< ??< ??. For any k. All Rights Reserved. for the • ??< = 0. ?? − 1. ?? : ?? ?? 1 − ?? 7 ??a = ?? ?? ??a Strictly Stationary: No moments of a time series It becomes ARI(p. Autocorrelation (acf) AR ?? = ??a = ??R ??a'R + ??? ??a'? + ⋯ + ??] ??a'] + ??a i. 6 www. Alternate Expression • ??R = ??R ??] ?? ??a = ??˛ ?? ??a TIME SERIES TIME SERIES • ??R = ??a'R + ??a A time series is a series of data indexed by time. ?? = ??a = ??R ??a'R + ⋯ + ??] ??a'] 2 A non-stationary time series which is the +??R ??a'R + ⋯ + ??˛ ??a'˛ + ??a accumulation of white noise. d. Actuaries.