Exam P

You have what it takes to pass updated 08/23/19

GENERAL PROBABILITY
GENERAL PROBABILITY UNIVARIATE PROBABILITY
UNIVARIATE PROBABILITY *Moment Generating Function (MGF)
DISTRIBUTIONS
DISTRIBUTIONS 𝑀𝑀C (𝑡𝑡) = 𝐸𝐸[𝑒𝑒 jC ]
Basic Probability Relationships 𝑀𝑀kClm (𝑡𝑡) = 𝑒𝑒 mj ⋅ 𝑀𝑀C (𝑎𝑎𝑎𝑎)
Pr(𝐴𝐴 ∪ 𝐵𝐵) = Pr(𝐴𝐴) + Pr(𝐵𝐵) − Pr(𝐴𝐴 ∩ 𝐵𝐵) *Learn both discrete and continuous cases 𝑀𝑀C (0) = 1
Pr(𝐴𝐴 ∪ 𝐵𝐵 ∪ 𝐶𝐶) 𝑀𝑀Cln (𝑡𝑡) = 𝑀𝑀C (𝑡𝑡) ⋅ 𝑀𝑀n (𝑡𝑡) (independent)
= Pr(𝐴𝐴) + Pr(𝐵𝐵) + Pr(𝐶𝐶) *Probability Mass Function (PMF) 𝑑𝑑1
𝑀𝑀 (𝑡𝑡)o = 𝐸𝐸[𝑋𝑋 1 ]
− Pr(𝐴𝐴 ∩ 𝐵𝐵) − Pr(𝐵𝐵 ∩ 𝐶𝐶) − Pr(𝐴𝐴 ∩ 𝐶𝐶) ∑EFF H 𝑝𝑝C (𝑥𝑥) = 1 𝑑𝑑𝑡𝑡 1 C j2\
+ Pr(𝐴𝐴 ∩ 𝐵𝐵 ∩ 𝐶𝐶) Pr(𝑋𝑋 = 𝑎𝑎) = 0 (continuous)
Pr(𝐴𝐴- ) = 1 − Pr(𝐴𝐴) Probability Generating Function (PGF)
*Cumulative Distribution Function 𝑃𝑃C (𝑡𝑡) = 𝐸𝐸[𝑡𝑡 C ]
Law of Total Probability (CDF) 𝑃𝑃C (0) = 𝑝𝑝C (0)
1
𝐹𝐹C (𝑥𝑥) = Pr(𝑋𝑋 ≤ 𝑥𝑥) = ∑0OH 𝑝𝑝C (𝑖𝑖) 𝑑𝑑1
(𝑡𝑡)o
Pr(𝐵𝐵) = / Pr(𝐵𝐵 ∩ 𝐴𝐴0 ) 𝑑𝑑𝑡𝑡 1 𝑃𝑃C
Pr(𝑎𝑎 < 𝑋𝑋 ≤ 𝑏𝑏) = 𝐹𝐹C (𝑏𝑏) − 𝐹𝐹C (𝑎𝑎) j2\
= 𝑝𝑝C (𝑛𝑛)
023
S 𝑛𝑛!
𝑓𝑓C (𝑥𝑥) = 𝐹𝐹 (𝑥𝑥) (continuous) 𝑑𝑑1
SH C
De Morgan’s Law 𝑃𝑃 (𝑡𝑡)o = 𝐸𝐸[𝑋𝑋(𝑋𝑋 − 1) … (𝑋𝑋 − 𝑛𝑛 + 1)]
𝑑𝑑𝑡𝑡 1 C j23
Pr[(𝐴𝐴 ∪ 𝐵𝐵)- ] = Pr(𝐴𝐴- ∩ 𝐵𝐵- ) *Expected Value
Pr[(𝐴𝐴 ∩ 𝐵𝐵)- ] = Pr(𝐴𝐴- ∪ 𝐵𝐵- ) 𝐸𝐸[𝑐𝑐] = 𝑐𝑐 Percentiles
Y
𝐸𝐸[𝑔𝑔(𝑋𝑋)] = ∫ZY 𝑔𝑔(𝑥𝑥) ⋅ 𝑓𝑓C (𝑥𝑥) 𝑑𝑑𝑑𝑑 The 100𝑝𝑝th percentile is the smallest value
Conditional Probability Y of 𝜋𝜋q where 𝐹𝐹C r𝜋𝜋q s ≥ 𝑝𝑝.
𝐸𝐸[𝑔𝑔(𝑋𝑋)] = ∫\ 𝑔𝑔- (𝑥𝑥) ⋅ 𝑆𝑆C (𝑥𝑥) 𝑑𝑑𝑑𝑑, for 𝑥𝑥 ≥ 0
Pr(𝐴𝐴 ∩ 𝐵𝐵)
Pr(𝐴𝐴|𝐵𝐵) = 8
Pr(𝐵𝐵) ∫_ 𝑔𝑔(𝑥𝑥) ⋅ 𝑓𝑓C (𝑥𝑥) 𝑑𝑑𝑑𝑑
𝐸𝐸[𝑔𝑔(𝑋𝑋)|𝑗𝑗 ≤ 𝑋𝑋 ≤ 𝑘𝑘] = Univariate Transformation
Pr(𝑗𝑗 ≤ 𝑋𝑋 ≤ 𝑘𝑘) 𝑑𝑑
Independence 𝐸𝐸[𝑐𝑐 ⋅ 𝑔𝑔(𝑋𝑋)] = 𝑐𝑐 ⋅ 𝐸𝐸[𝑔𝑔(𝑋𝑋)] 𝑓𝑓n (𝑦𝑦) = 𝑓𝑓C [𝑔𝑔Z3 (𝑦𝑦)] ⋅ o 𝑔𝑔Z3 (𝑦𝑦)o
𝑑𝑑𝑑𝑑
Pr(𝐴𝐴 ∩ 𝐵𝐵) = Pr(𝐴𝐴) ⋅ Pr(𝐵𝐵) 𝐸𝐸[𝑔𝑔3 (𝑋𝑋) + ⋯ + 𝑔𝑔8 (𝑋𝑋)] where 𝑦𝑦 = 𝑔𝑔(𝑥𝑥) ⇔ 𝑥𝑥 = 𝑔𝑔Z3(𝑦𝑦)
Pr(𝐴𝐴|𝐵𝐵) = Pr(𝐴𝐴) = 𝐸𝐸[𝑔𝑔3 (𝑋𝑋)] + ⋯ + 𝐸𝐸[𝑔𝑔8 (𝑋𝑋)]

Bayes’ Theorem Variance, Standard Deviation, and
Pr(𝐵𝐵|𝐴𝐴8 ) ⋅ Pr(𝐴𝐴8 ) Coefficient of Variation
Pr(𝐴𝐴8 |𝐵𝐵) = 1
∑023 Pr(𝐵𝐵|𝐴𝐴0 ) ⋅ Pr(𝐴𝐴0 ) 𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋] = 𝐸𝐸[𝑋𝑋 c ] − (𝐸𝐸[𝑋𝑋])c
𝑉𝑉𝑉𝑉𝑉𝑉[𝑎𝑎𝑎𝑎 + 𝑏𝑏] = 𝑎𝑎c ⋅ 𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋]
Combinatorics 𝑉𝑉𝑉𝑉𝑉𝑉[𝑐𝑐] = 0
𝑛𝑛! = 𝑛𝑛 ⋅ (𝑛𝑛 − 1) ⋅ … ⋅ 2 ⋅ 1 𝑆𝑆𝑆𝑆[𝑋𝑋] = e𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋]
𝑛𝑛!
1𝑃𝑃8 =
𝐶𝐶𝐶𝐶[𝑋𝑋] = 𝑆𝑆𝑆𝑆[𝑋𝑋]⁄𝐸𝐸[𝑋𝑋]
(𝑛𝑛 − 𝑘𝑘)!

𝑛𝑛 𝑛𝑛!
1𝐶𝐶8 = @𝑘𝑘 A =
(𝑛𝑛 − 𝑘𝑘)! ⋅ 𝑘𝑘!

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Discrete Distributions
PMF Mean Variance MGF PGF Special Properties
(ml3)j
1 𝑎𝑎 + 𝑏𝑏 (𝑏𝑏 − 𝑎𝑎 + 1)c − 1 𝑒𝑒 kj − 𝑒𝑒
Discrete Uniform – –
𝑏𝑏 − 𝑎𝑎 + 1 2 12 (1 − 𝑒𝑒j )(𝑏𝑏 − 𝑎𝑎 + 1)
𝑛𝑛
Binomial @ A 𝑝𝑝 H (1 − 𝑝𝑝)1ZH 𝑛𝑛𝑛𝑛 𝑛𝑛𝑛𝑛(1 − 𝑝𝑝) (𝑝𝑝𝑒𝑒 j + 𝑞𝑞)1 (𝑝𝑝𝑝𝑝 + 𝑞𝑞)1 –
𝑥𝑥
𝑚𝑚 𝑁𝑁 − 𝑚𝑚 𝑁𝑁 𝑚𝑚
Hypergeometric w@ 𝑥𝑥 A ⋅ @ Az{@ A 𝑛𝑛 ⋅ – – – –
𝑛𝑛 − 𝑥𝑥 𝑛𝑛 𝑁𝑁

Geometric 1 𝑝𝑝𝑒𝑒 j 𝑝𝑝𝑝𝑝

(1 − 𝑝𝑝)HZ3 𝑝𝑝
𝑝𝑝 1 − 𝑝𝑝 1 − (1 − 𝑝𝑝)𝑒𝑒j 1 − (1 − 𝑝𝑝)𝑡𝑡 Memoryless

𝑋𝑋: trials; 𝑌𝑌: failures 1 𝑝𝑝c 𝑝𝑝 𝑝𝑝 property
(1 − 𝑝𝑝)á 𝑝𝑝 − 1
𝑋𝑋 = 𝑌𝑌 + 1 𝑝𝑝 1 − (1 − 𝑝𝑝)𝑒𝑒j 1 − (1 − 𝑝𝑝)𝑡𝑡
ä
Negative 𝑥𝑥 − 1 ä 𝑟𝑟 𝑝𝑝𝑒𝑒 j 𝑝𝑝𝑝𝑝 ä
à â 𝑝𝑝 (1 − 𝑝𝑝) HZä ã å à â
Binomial 𝑟𝑟 − 1 𝑝𝑝 1 − 𝑝𝑝 1 − (1 − 𝑝𝑝)𝑒𝑒j 1 − (1 − 𝑝𝑝)𝑡𝑡 Neg Bin(𝑟𝑟 = 1, 𝑝𝑝) ~
𝑟𝑟 à c â
𝑋𝑋: trials; 𝑌𝑌: failures 𝑦𝑦 + 𝑟𝑟 − 1 𝑟𝑟 𝑝𝑝 𝑝𝑝 ä 𝑝𝑝 ä Geometric(𝑝𝑝)
à â 𝑝𝑝ä (1 − 𝑝𝑝)á − 𝑟𝑟 à â à â
𝑋𝑋 = 𝑌𝑌 + 𝑟𝑟 𝑟𝑟 − 1 𝑝𝑝 1 − (1 − 𝑝𝑝)𝑒𝑒j 1 − (1 − 𝑝𝑝)𝑡𝑡

Sum of independent
𝑒𝑒 Zè ⋅ 𝜆𝜆H èrë í Z3s è(jZ3)
Poisson 𝜆𝜆 𝜆𝜆 𝑒𝑒 𝑒𝑒 Poissons ~ Poisson
𝑥𝑥!
(𝜆𝜆 = ∑1023 𝜆𝜆0 )

Continuous Distributions

PDF CDF Mean Variance MGF Special Properties

Continuous 1 𝑥𝑥 − 𝑎𝑎 𝑎𝑎 + 𝑏𝑏 (𝑏𝑏 − 𝑎𝑎)c 𝑒𝑒 mj − 𝑒𝑒 kj (𝑋𝑋|𝑋𝑋 > 𝑐𝑐) ~ Uniform(𝑐𝑐, 𝑏𝑏)

Uniform 𝑏𝑏 − 𝑎𝑎 𝑏𝑏 − 𝑎𝑎 2 12 𝑡𝑡(𝑏𝑏 − 𝑎𝑎) (𝑋𝑋 − 𝑐𝑐|𝑋𝑋 > 𝑐𝑐) ~ Uniform(0, 𝑏𝑏 − 𝑐𝑐)
1 ZH H 1 Memoryless property:
Exponential 𝑒𝑒 ï 1 − 𝑒𝑒 Zï 𝜃𝜃 𝜃𝜃 c
𝜃𝜃 1 − 𝜃𝜃𝜃𝜃 (𝑋𝑋 − 𝑎𝑎|𝑋𝑋 > 𝑎𝑎) ~ 𝑋𝑋
ñZ3

𝑥𝑥 ñZ3 1 − / Pr(𝑌𝑌 = 𝑘𝑘) , ñ Sum of 𝛼𝛼 independent

Z
H 1
Gamma ⋅ 𝑒𝑒 ï 82\
𝛼𝛼𝛼𝛼 𝛼𝛼𝜃𝜃 c à â exponentials(𝜃𝜃) ~
Γ(𝛼𝛼) ⋅ 𝜃𝜃 ñ H 1 − 𝜃𝜃𝜃𝜃 Gamma(𝛼𝛼, 𝜃𝜃)
𝑌𝑌 ~ Poisson@𝜆𝜆 = ï A

Symmetry:
𝑋𝑋 − 𝜇𝜇 Pr(𝑍𝑍 ≤ 𝑧𝑧) = Pr(𝑍𝑍 ≥ −𝑧𝑧)
1 (HZõ)ú 𝑍𝑍 = Pr(𝑍𝑍 ≤ −𝑧𝑧) = Pr(𝑍𝑍 ≥ 𝑧𝑧)
Normal ⋅ 𝑒𝑒
Z
cù ú 𝜎𝜎 𝜇𝜇 𝜎𝜎 c
ùúj ú
𝜎𝜎√2𝜋𝜋 𝑒𝑒 õjl c
Pr(𝑍𝑍 ≤ 𝑧𝑧) = Φ(𝑧𝑧) Sum of independent normals ~
Normalr𝜇𝜇 = ∑1023 𝜇𝜇0 , 𝜎𝜎 c = ∑1023 𝜎𝜎0cs

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MULTIVARIATE PROBABILITY Independence Bivariate Continuous Uniform
MULTIVARIATE PROBABILITY
DISTRIBUTIONS 𝐹𝐹C,n (𝑥𝑥, 𝑦𝑦) = 𝐹𝐹C (𝑥𝑥) ⋅ 𝐹𝐹n (𝑦𝑦) 1
DISTRIBUTIONS 𝑓𝑓C,n (𝑥𝑥, 𝑦𝑦) =
𝑓𝑓C,n (𝑥𝑥, 𝑦𝑦) = 𝑓𝑓C (𝑥𝑥) ⋅ 𝑓𝑓n (𝑦𝑦) Area of domain
Area of region
*Learn both discrete and continuous cases 𝐸𝐸[ℎ(𝑋𝑋) ⋅ 𝑘𝑘(𝑌𝑌)] = 𝐸𝐸[ℎ(𝑋𝑋)] ⋅ 𝐸𝐸[𝑘𝑘(𝑌𝑌)] Pr(region) =
Area of domain
𝑀𝑀C,n (𝑠𝑠, 𝑡𝑡) = 𝑀𝑀C (𝑠𝑠) ⋅ 𝑀𝑀n (𝑡𝑡)

*Joint PMF and CDF 𝐶𝐶𝐶𝐶𝐶𝐶[𝑋𝑋, 𝑌𝑌] = 0 Bivariate Normal
∑EFF H ∑EFF á 𝑝𝑝C,n (𝑥𝑥, 𝑦𝑦) = 1 𝜌𝜌C,n = 0
For 𝑋𝑋 ~ Normal(𝜇𝜇C , 𝜎𝜎C c ) and
𝐹𝐹C,n (𝑥𝑥, 𝑦𝑦) = ∑£OH ∑jOá 𝑝𝑝C,n (𝑠𝑠, 𝑡𝑡) 𝑌𝑌 ~ Normal(𝜇𝜇n , 𝜎𝜎n c ),
§ú
𝐹𝐹 (𝑥𝑥, 𝑦𝑦) = 𝑓𝑓C,n (𝑥𝑥, 𝑦𝑦) (continuous) *Joint MGF
§H §á C,n
𝑀𝑀C,n (𝑠𝑠, 𝑡𝑡) = 𝐸𝐸[𝑒𝑒 £Cljn ] (𝑌𝑌|𝑋𝑋 = 𝑥𝑥) ~ Normal
§
𝐸𝐸[𝑋𝑋] = 𝑀𝑀C,n (𝑠𝑠, 𝑡𝑡)´ where
*Marginal Distributions and §£ £2j2\
𝑥𝑥 − 𝜇𝜇C
Conditional Distributions §
𝐸𝐸[𝑌𝑌] = §j 𝑀𝑀C,n (𝑠𝑠, 𝑡𝑡)´ 𝐸𝐸[𝑌𝑌|𝑋𝑋 = 𝑥𝑥] = 𝜇𝜇n + 𝜌𝜌 ⋅ 𝜎𝜎n à â
£2j2\ 𝜎𝜎C
𝑝𝑝C (𝑥𝑥) = ∑EFF á 𝑝𝑝C,n (𝑥𝑥, 𝑦𝑦)
𝐸𝐸[𝑋𝑋 ¨ 𝑌𝑌 1 ] =
§≠ÆØ
𝑀𝑀C,n (𝑠𝑠, 𝑡𝑡)´ 𝑉𝑉𝑉𝑉𝑉𝑉[𝑌𝑌|𝑋𝑋 = 𝑥𝑥] = 𝜎𝜎n c (1 − 𝜌𝜌c )
𝑝𝑝n (𝑦𝑦) = ∑EFF H 𝑝𝑝C,n (𝑥𝑥, 𝑦𝑦) §£ ≠ §j Ø £2j2\
𝑝𝑝C|n (𝑥𝑥|𝑌𝑌 = 𝑦𝑦) = 𝑝𝑝C,n (𝑥𝑥, 𝑦𝑦)⁄𝑝𝑝n (𝑦𝑦) 𝑀𝑀C,n (𝑡𝑡, 𝑡𝑡) = 𝑀𝑀Cln (𝑡𝑡)
Expectation and Variance for Sum and
Average of I.I.D. Random Variables
*Joint Expected Value and Multivariate Transformation 𝑆𝑆 = 𝑋𝑋3 + ⋯ + 𝑋𝑋1
Conditional Expectation 𝑓𝑓∞±,∞ú (𝑤𝑤3 , 𝑤𝑤c )
𝑋𝑋ø = [𝑋𝑋3 + ⋯ + 𝑋𝑋1 ]⁄𝑛𝑛
𝐸𝐸[𝑔𝑔(𝑋𝑋, 𝑌𝑌)] = 𝑓𝑓C±,Cú [ℎ3 (𝑤𝑤3 , 𝑤𝑤c ), ℎc (𝑤𝑤3 , 𝑤𝑤c )] ⋅ | 𝐽𝐽|
Y Y
= ∫ZY ∫ZY 𝑔𝑔(𝑥𝑥, 𝑦𝑦) ⋅ 𝑓𝑓C,n (𝑥𝑥, 𝑦𝑦) 𝑑𝑑𝑑𝑑 𝑑𝑑𝑑𝑑 where 𝐸𝐸[𝑆𝑆] = 𝑛𝑛 ⋅ 𝐸𝐸[𝑋𝑋0 ]
Y
𝐸𝐸[𝑋𝑋|𝑌𝑌 = 𝑦𝑦] = ∫ZY 𝑥𝑥 ⋅ 𝑓𝑓C|n (𝑥𝑥|𝑌𝑌 = 𝑦𝑦) 𝑑𝑑𝑑𝑑 𝑥𝑥3 = ℎ3 (𝑤𝑤3 , 𝑤𝑤c ) 𝐸𝐸[𝑋𝑋ø] = 𝐸𝐸[𝑋𝑋0 ]
𝑥𝑥c = ℎc (𝑤𝑤3 , 𝑤𝑤c ) 𝑉𝑉𝑉𝑉𝑉𝑉[𝑆𝑆] = 𝑛𝑛 ⋅ 𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋0 ]

𝜕𝜕𝑥𝑥3 𝜕𝜕𝑥𝑥3 𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋ø] = (1/𝑛𝑛) ⋅ 𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋0 ]
Double Expectation and
𝜕𝜕𝑤𝑤3 𝜕𝜕𝑤𝑤c
Law of Total Variance 𝐽𝐽 = ¥¥ ¥
𝜕𝜕𝑥𝑥c 𝜕𝜕𝑥𝑥c ¥
𝐸𝐸[𝑋𝑋] = 𝐸𝐸•𝐸𝐸[𝑋𝑋|𝑌𝑌]¶ Central Limit Theorem
𝜕𝜕𝑤𝑤3 𝜕𝜕𝑤𝑤c
The sum of a large number of identically
𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋] = 𝐸𝐸•𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋|𝑌𝑌]¶ + 𝑉𝑉𝑉𝑉𝑉𝑉•𝐸𝐸[𝑋𝑋|𝑌𝑌]¶
and independently distributed (i.i.d.)
Multinomial Distribution
random variables approximately follows a
Covariance and Correlation Coefficient Pr(𝑋𝑋3 = 𝑥𝑥3 , … , 𝑋𝑋8 = 𝑥𝑥8 )
normal distribution.
𝐶𝐶𝐶𝐶𝐶𝐶[𝑋𝑋, 𝑌𝑌] = 𝐸𝐸[𝑋𝑋𝑋𝑋] − 𝐸𝐸[𝑋𝑋]𝐸𝐸[𝑌𝑌] 𝑛𝑛!
= ⋅ 𝑝𝑝 H± ⋅ … ⋅ 𝑝𝑝8 H∂
𝐶𝐶𝐶𝐶𝐶𝐶[𝑎𝑎𝑎𝑎, 𝑏𝑏𝑏𝑏] = 𝑎𝑎𝑎𝑎 ⋅ 𝐶𝐶𝐶𝐶𝑣𝑣[𝑋𝑋, 𝑌𝑌] 𝑥𝑥3 ! ⋅ … ⋅ 𝑥𝑥8 ! 3
Order Statistics
𝐶𝐶𝐶𝐶𝐶𝐶[𝑋𝑋, 𝑋𝑋] = 𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋] 𝐸𝐸[𝑋𝑋0 ] = 𝑛𝑛𝑝𝑝0
𝑋𝑋(3) = min(𝑋𝑋3 , 𝑋𝑋c , … , 𝑋𝑋1 )
𝑉𝑉𝑉𝑉𝑉𝑉[𝑎𝑎𝑎𝑎 + 𝑏𝑏𝑏𝑏] = 𝑎𝑎c 𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋] + 𝑏𝑏c 𝑉𝑉𝑉𝑉𝑉𝑉[𝑌𝑌] 𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋0 ] = 𝑛𝑛𝑝𝑝0 (1 − 𝑝𝑝0 )
𝑋𝑋(1) = max(𝑋𝑋3 , 𝑋𝑋c , … , 𝑋𝑋1 )
+ 2𝑎𝑎𝑎𝑎 ⋅ 𝐶𝐶𝐶𝐶𝐶𝐶[𝑋𝑋, 𝑌𝑌] 𝐶𝐶𝐶𝐶𝐶𝐶•𝑋𝑋0 , 𝑋𝑋_ ¶ = −𝑛𝑛𝑝𝑝0 𝑝𝑝_ , 𝑖𝑖 ≠ 𝑗𝑗

𝐶𝐶𝐶𝐶𝐶𝐶[𝑋𝑋, 𝑌𝑌] For i.i.d. random variables,
𝜌𝜌C,n = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶[𝑋𝑋, 𝑌𝑌] = 𝑆𝑆C(±) (𝑥𝑥) = [𝑆𝑆C (𝑥𝑥)]1
e𝑉𝑉𝑉𝑉𝑉𝑉[𝑋𝑋]e𝑉𝑉𝑉𝑉𝑉𝑉[𝑌𝑌]
𝐹𝐹C(Ø) (𝑥𝑥) = [𝐹𝐹C (𝑥𝑥)]1

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INSURANCE AND RISK MANAGEMENT INSURANCE AND RISK MANAGEMENT

Category Definition of Payment, 𝒀𝒀 𝑬𝑬[𝒀𝒀]
Y
0, 𝑋𝑋 ≤ 𝑑𝑑 ∫S (𝑥𝑥 − 𝑑𝑑) ⋅ 𝑓𝑓C (𝑥𝑥) 𝑑𝑑𝑑𝑑 For exponential:
Deductible 𝑌𝑌 = ∆ Y
𝑋𝑋 − 𝑑𝑑, 𝑋𝑋 > 𝑑𝑑 ∫S 𝑆𝑆C (𝑥𝑥) 𝑑𝑑𝑑𝑑 𝜃𝜃 ⋅ Pr(𝑋𝑋 > 𝑑𝑑)

…
𝑋𝑋, 𝑋𝑋 < 𝑢𝑢 ∫\ 𝑥𝑥 ⋅ 𝑓𝑓C (𝑥𝑥) 𝑑𝑑𝑑𝑑 + 𝑢𝑢 ⋅ 𝑆𝑆C (𝑢𝑢) For exponential:
Policy Limit 𝑌𝑌 = «
𝑢𝑢, 𝑋𝑋 ≥ 𝑢𝑢 …
∫\ 𝑆𝑆C (𝑥𝑥) 𝑑𝑑𝑑𝑑 𝜃𝜃 ⋅ Pr(𝑋𝑋 < 𝑢𝑢)

Deductible and Policy Limit 0, 𝑋𝑋 ≤ 𝑑𝑑 Sl…

(𝑥𝑥 − 𝑑𝑑) ⋅ 𝑓𝑓C (𝑥𝑥) 𝑑𝑑𝑑𝑑 + 𝑢𝑢 ⋅ 𝑆𝑆C (𝑑𝑑 + 𝑢𝑢)
∫S For exponential:
(𝑢𝑢 is the policy limit/ 𝑌𝑌 =  𝑋𝑋 − 𝑑𝑑, 𝑑𝑑 < 𝑋𝑋 < 𝑑𝑑 + 𝑢𝑢 Sl…
𝑢𝑢, 𝑋𝑋 ≥ 𝑑𝑑 + 𝑢𝑢 ∫S 𝑆𝑆C (𝑥𝑥) 𝑑𝑑𝑑𝑑 𝜃𝜃 ⋅ Pr(𝑑𝑑 < 𝑋𝑋 < 𝑑𝑑 + 𝑢𝑢)
maximum payment)

Unreimbursed Loss, 𝒁𝒁
If 𝑋𝑋 is the loss and 𝑌𝑌 is the payment (i.e. reimbursed loss), then 𝑋𝑋 = 𝑌𝑌 + 𝑍𝑍 ⇒ 𝑍𝑍 = 𝑋𝑋 − 𝑌𝑌, and 𝐸𝐸[𝑍𝑍] = 𝐸𝐸[𝑋𝑋] − 𝐸𝐸[𝑌𝑌].

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