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Examination: Subject CT3 Probability and Mathematical Statistics Core Technical
Examination: Subject CT3 Probability and Mathematical Statistics Core Technical
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 13 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.
Faculty of Actuaries
CT3 A2005 Institute of Actuaries
1 Calculate the sample mean and standard deviation of the following claim amounts (£):
534 671 581 620 401 340 980 845 550 690
[3]
M(t) = (1 10t) 2.
Show that E[X 2] = 600 and find the value of E[X 3]. [3]
4 Consider a random sample of size 16 taken from a normal distribution with mean
= 25 and variance 2 = 4. Let the sample mean be denoted X .
State the distribution of X and hence calculate the probability that X assumes a
value greater than 26. [3]
5 Consider a random sample of size 21 taken from a normal distribution with mean
= 25 and variance 2 = 4. Let the sample variance be denoted S2.
State the distribution of the statistic 5S2 and hence find the variance of the statistic S2.
[3]
7 For a group of policies the total number of claims arising in a year is modelled as a
Poisson variable with mean 10. Each claim amount, in units of £100, is independently
modelled as a gamma variable with parameters = 4 and = 1/5.
Calculate the mean and standard deviation of the total claim amount. [5]
CT3 A2005 2
8 The distribution of claim size under a certain class of policy is modelled as a normal
random variable, and previous years records indicate that the standard deviation is
£120.
(i) Calculate the width of a 95% confidence interval for the mean claim size if a
sample of size 100 is available. [2]
(ii) Determine the minimum sample size required to ensure that a 95% confidence
interval for the mean claim size is of width at most £10 . [2]
(iii) Comment briefly on the comparison of the confidence intervals in (i) and (ii)
with respect to widths and sample sizes used. [1]
[Total 5]
9 Let X1, , Xn denote a large random sample from a distribution with unknown
population mean and known standard deviation 3. The null hypothesis H0: = 1 is
to be tested against the alternative hypothesis H1: > 1, using a test based on the
sample mean with a critical region of the form X k , for a constant k.
k 0.8 k 1.2
0.95 and 0.10
3/ n 3/ n
(ii) The values for the sample size n and the critical value k which satisfy the
requirements of part (i) are n = 482 and k = 1.025 (you are not asked to verify
these values).
5
5(105 ) 10
f ( x) = 6
, x 0 ; F ( x) = 1 .
(10 x) 10 x
You are given the information that the distribution of X has mean 2.5 units (£25,000)
and standard deviation 3.23 units (£32,300).
(i) Describe briefly the nature of a model for claim sizes for which the standard
deviation can be greater than the mean. [2]
0.2
x = 10 (1 r ) 1
0.2
x = 10 r 1
(c) Calculate the missing values for the simulated claim amounts in the
table below (which has been obtained using the method in (ii)(b)
above):
r Claim (£)
0.7423 6,141
0.0291 10,2872
0.2770 29,272
0.5895 11,148
0.1131 54,635
0.9897 207
0.6875 7,782
0.8525 3,243
0.0016 ?
0.5154 ?
[5]
[Total 7]
CT3 A2005 4
11 Twenty insects were used in an experiment to examine the effect on their activity
level, y, of 3 standard preparations of a chemical. The insects were randomly
assigned, 4 to receive each of the preparations and 8 to remain untreated as controls.
Their activity levels were metered from vibrations in a test chamber and were as
follows:
Activity levels (y) Totals
Control 43 40 65 51 33 39 54 62 387
Preparation A 73 55 61 65 254
Preparation B 84 63 51 72 270
Preparation C 46 91 84 71 292
(i) Conduct an analysis of variance test to establish whether the data indicate
significant differences amongst the results for the four treatments. [7]
(ii) (a) Complete the following table of residuals for the data and analysis in
part (i) above:
(b) Make a rough plot of the residuals against the treatment means.
(d) Comment on how well the data conform to these assumptions in the
light of the residual plot. [8]
Comment on any evidence for this and state how you would formally test for
this effect (but do not carry out the test). [4]
[Total 19]
y
e
p( y ) = ( y = 1, 2, ).
y !(1 e )
(ii) (a) Let y1, , yn denote a random sample from the zero-truncated Poisson
distribution.
e
y = 0,
1 e
and deduce that the maximum likelihood estimate is the same as the
method of moments estimate.
(b) Obtain an expression for the Cramer-Rao lower bound (CRlb) for the
variance of an unbiased estimator of .
[9]
(iii) The following table gives the numbers of occupants in 2,423 cars observed on
a road junction during a certain time period on a weekday morning.
Number of occupants 1 2 3 4 5 6
Frequency of cars 1,486 694 195 37 10 1
(a) Obtain the expected frequencies for the fitted model, and use a 2
goodness-of-fit test to show that the model is appropriate for the data.
CT3 A2005 6
13 As part of an investigation into health service funding a working party was concerned
with the issue of whether mortality rates could be used to predict sickness rates. Data
on standardised mortality rates and standardised sickness rates were collected for a
sample of 10 regions and are shown in the table below:
1 125.2 206.8
2 119.3 213.8
3 125.3 197.2
4 111.7 200.6
5 117.3 189.1
6 100.7 183.6
7 108.8 181.2
8 102.0 168.2
9 104.7 165.2
10 121.1 228.5
Data summaries:
(i) Calculate the correlation coefficient between the mortality rates and the
sickness rates and determine the probability-value for testing whether the
underlying correlation coefficient is zero against the alternative that it is
positive. [4]
(ii) Noting the issue under investigation, draw an appropriate scatterplot for these
data and comment on the relationship between the two rates. [3]
(iii) Determine the fitted linear regression of sickness rate on mortality rate and test
whether the underlying slope coefficient can be considered to be as large
as 2.0. [5]
(iv) For a region with mortality rate 115.0, estimate the expected sickness rate and
calculate 95% confidence limits for this expected rate. [4]
[Total 16]
END OF PAPER
CT3 A2005 7
Faculty of Actuaries Institute of Actuaries
EXAMINATION
April 2005
EXAMINERS REPORT
Introduction
The attached subject report has been written by the Principal Examiner with
the aim of helping candidates. The questions and comments are based around
Core Reading as the interpretation of the syllabus to which the examiners are
working. They have however given credit for any alternative approach or
interpretation which they consider to be reasonable.
M Flaherty
Chairman of the Board of Examiners
15 June 2005
Faculty of Actuaries
Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2005 Examiners Report
1 x = 6212 , x2 = 4186784
6212
x = £621.20
10
1 62122 327889.6
s 4186784 = £190.87
9 10 9
2 (a) P( A B) P( A) P( B ) P( A B) 1 1 3 1
2 2 4 4
P ( A) P( B) ( 12 )( 12 ) 1
4
so the events A and B are independent as
P( A B) P( A) P( B).
(b) P( A B C) P( A) P ( B) P(C ) P( A B) P( A C ) P( B C )
P( A B C)
1 1 1 1 1 1 1 5
2 2 3 4 6 6 12 6
[OR P ( A B C) P( A B ) P (C ) P ( A C ) P( B C ) P( A B C)
3 1 1 1 1 5 .]
4 3 6 6 12 6
3 M(t) = (1 10t) 2
M (t) = ( 2)( 10)(1 10t) 3 = 20(1 10t) 3
M (t) = ( 60)( 10)(1 10t) 4 = 600(1 10t) 4 Putting t = 0 E[X2] = 600
M (t) = ( 2400)( 10)(1 10t) 5 = 24000(1 10t) 5 Putting t = 0 E[X3] = 24000
[OR use the power series expansion M(t) = 1 + 20t + 600t2/2! + 24000t3/3! + ]
[OR use the result on E[X r] for a gamma(2,0.1) variable in the Yellow Book]
4 X ~ N 25, 0.25
26 25
P X 26 P Z P Z 2 1 0.97725 0.02275
0.5
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2005 Examiners Report
n 1 S2
5 2
5S 2 ~ 2
20
2
V[5S2] = variance of 20 = 40, so V[S2] = 40/25 = 1.6
x 172
6 p 0.86
n 200
p (1 p )
95% CI is p 1.96
n
Note that E[N] = V[N] = 10, E[X] = 4/(1/5) = 20, V[X] = 4/(1/5)2 = 100
1.96 120
n 23.52 , n 553.19
10
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2005 Examiners Report
32
9 (i) X approx N , for large n by the central limit theorem.
n
0.05 P(reject H0| = 0.8) = P( X > k| = 0.8)
k 0.8
=1
3/ n
k 0.8
0.95
3/ n
and
= P(X k| 1.2)
k 1.2
=
3/ n
1.025 1
1 1 (0.18) 1 0.57 0.43.
3 / 482
10 (i) X takes positive values only so to have such a relatively high standard
deviation the distribution must be positively skewed with sizeable probability
associated with high values (i.e. the model embraces high claim sizes; the
density has a long or heavy tail).
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2005 Examiners Report
H0: no treatment effects (i.e. population means are equal) v H1: not H0
Analysis of Variance
Source DF SS MS F
Factor 3 2031 677 3.79
Error 16 2858 179
Total 19 4889
P-value is lower than 0.05 (but higher than 0.01), so we can reject H0 at least
at the 5% level of testing (Note: actually P-value is 0.032). The data do
indicate significant differences amongst the treatment means.
(b)
20
10
0
resids
-10
-20
-30
means 50 60 70
treatment Control A B C
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2005 Examiners Report
(c) Observations Yij (jth value for treatment i) are independent and
normally distributed with variance 2 which is constant across
treatments.
(d) The assumptions seem reasonable with the exception of the constant
variance assumption, which is questionable the data for preparation
A appear to be less variable than the data for the other treatments.
(iii) The control mean is lower than all three treatment means
(48.4 v 63.5, 67.5, 73.0) so there is prima facie evidence to support the
suggestion.
12 (i) (a) The probability function for the zero-truncated Poisson distribution is
given by
P(Y y and Y 0)
P (Y y |Y 0)
P(Y 0)
y
e
y !(1 P(Y 0))
y
e
( y 1, 2, ).
y !(1 e )
(b) Expectation of Y:
y
e
E[Y ] y
y 1 y !(1 e )
z
e
(z y 1)
(1 e ) z 0 z!
[1] .
(1 e ) (1 e )
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2005 Examiners Report
n
log L( ) yi log n n log(1 e ) constant
i 1
d log L( ) ny e
n n
d 1 e
d log L( ) e
0 y 0
d 1 e
y and E[Y ]
1 e 1 e
d2 ny e
(b) 2
log L( ) 2
n
d (1 e ) 2
1 1
CRlb
2
d 1 e
E 2
log L( ) n
d (1 e ) (1 e ) 2
(1 e ) 2
or .
n(1 e e )
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2005 Examiners Report
(iii) (a) The expected frequencies for the fitted zero-truncated Poisson model
are given by
y
e
n ( y 1, 2, ) where 0.8925 and n 2423
y !(1 e )
y 1 2 3 4 5 6 Total
ei 1500.48 669.59 199.20 44.45 7.93 1.35 2423.00
fi 1486 694 195 37 10 1 2423
The Yellow Book gives that the probability value is greater than 50%,
therefore there is no evidence to reject the null hypothesis, i.e. the
model seems appropriate for the data.
4
0.8925 1.96 5.711574 10 , since CRlb 5.711574 10-4
at = 0.8925,
0.84566 0.93934
0.84566
, 0.93934
= (1.48, 1.54).
1 e 1 e
Page 8
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2005 Examiners Report
1278.118
r 0.764
(780.709)(3587.656)
r 8
t 3.35 Prob-value = P(t8 > 3.35) = 0.005 from tables.
1 r2
(ii) Given the issue of whether mortality can be used to predict sickness, we
require a plot of sickness against mortality:
Page 9
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2005 Examiners Report
1278.118 1
(iii) 1.6371 and [1934.2 (1136.1)] 7.426
780.709 10
2 1 (1278.118) 2
{3587.656 } 186.902
8 780.709
2
Var[ ] 0.2394
780.709
1.6371 2
t 0.74 on 8 df
0.2394
2 1 (115 113.61) 2
with variance = { } 19.1528
10 780.709
195.69 t8(s.e.)
Page 10
Faculty of Actuaries Institute of Actuaries
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 14 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.
Faculty of Actuaries
CT3 S2005 Institute of Actuaries
1 The table below gives the number of thunderstorms reported in a particular summer
month by 100 meteorological stations.
Number of thunderstorms: 0 1 2 3 4 5
Number of stations: 22 37 20 13 6 2
(c) Comment briefly on the comparison of the mean and the median.
[3]
2 In an opinion poll, each individual in a random sample of 275 individuals from a large
population is asked which political party he/she supports. If 45% of the population
support party A, calculate (approximately) the probability that at least 116 of the
sample support A. [3]
Calculate an approximate value for the probability that an individual claim amount
exceeds 120, giving a reason for the approach you use. [3]
4 Calculate a 99% confidence interval for the percentage of claims for household
accidental damage which are fully settled within six months of being submitted, given
that in a random sample of 100 submitted claims of this type, exactly 83 were fully
settled within six months of being submitted. [3]
5 A random sample of 500 claim amounts resulted in a mean of £237 and a standard
deviation of £137.
Calculate an approximate 95% confidence interval for the true underlying mean claim
amount for such claims, explaining why the normal distribution can be used.
[3]
CT3 S2005 2
7 A sample of 20 claim amounts (£) on a group of household policies gave the
following data summaries:
(a) Calculate the sample mean and standard deviation for these claim amounts.
(b) Comment on the skewness of the distribution of these claim amounts, giving
reasons for your answer. [4]
if no claim is made in the first year, the premium for the second year is £400k,
where k is a constant such that 0 < k < 1;
if no claim is made in the first and second years, the premium for the third
year is £400k2;
if a claim is made, the premium the following year reverts to £400 and the
procedure starts again as above.
(i) Show that the probability distribution of the premium for the fourth year, that
is, for the year following the third year, is given by
(ii) Obtain an expression for the expected premium for the fourth year under this
procedure. [1]
(iii) If it is desired that this expected premium should equal £300, determine the
required value of k for the case where p = 0.1. [3]
[Total 7]
10 Let X denote a random variable with a continuous uniform (0, 1000) distribution.
Define a random variable Y as the minimum of X and 800.
(i) Show that the conditional distribution of X given X < 800 is a continuous
uniform (0, 800) distribution. [2]
(ii) Verify (giving clear reasons) that the expectation of the random variable Y is
480. [3]
(iii) Suppose that Y1, , Yn are independent and identically distributed, each with
the same distribution as Y.
(iv) Comment on the comparison of the conditional expectation of X given X < 800
with the expectation of Y. [2]
[Total 8]
CT3 S2005 4
11 Consider the following simple model for the number of claims, N, which occur in a
year on a policy:
n 0 1 2 3
P(N = n) 0.55 0.25 0.15 0.05
12 A certain type of insurance policy has a claim rate of per year and the cover ceases
and the policy expires after the first claim. Accordingly the duration of a policy is
modelled by an exponential distribution with density function e x : 0 x .
A company has data on (m + n) policies which have expired and which may be
assumed to be independent. Of these, m policies had duration less than 5 years and n
policies had duration greater than or equal to 5 years.
(i) An investigator makes note of the actual durations, x1, , xn, of the latter
group of n policies, but ignores the former group without even noting the
value of m.
x
f ( x) = k . e , 5 x
(b) Write down the likelihood for the data from the point of view of this
investigator and hence show that the maximum likelihood estimate
(MLE) of is given by
n
n
.
xi 5n
i 1
(c) The data yield the values: n = 10 and xi = 71. Calculate this
investigator s MLE of .
[8]
(a) Write down the likelihood for this information and hence show that the
resulting MLE of is given by
1 m n
= log .
5 n
(b) The same data as in part (i) yield the values: m = 120 and n = 10.
Calculate this investigator s MLE of .
[5]
(iii) The two investigators decide to pool their data, and so have the information
that there are m policies with duration less than 5 years, and n policies with
actual durations x1, ... , xn.
(a) Explain why the likelihood for this joint information is given by
n
5 xi
L( ) = (1 e )m . e
i 1
and determine an equation, the solution of which will lead to the MLE
of .
(b) Given that this leads to an MLE of equal to 0.508, comment on the
comparison of the three MLE s.
[5]
[Total 18]
13 A survey, carried out at a major flower and gardening show, was concerned with the
association between the intention to return to the show next year and the purchase of
goods at this year s show. There were 220 people interviewed and of these 101 had
made a purchase; 69 of these people said they intended to return next year. Of the
119 who had not made a purchase, 68 said they intended to return next year.
(a) intends to return next year, given that he/she has made a purchase
(b) intends to return next year, given that he/she has not made a purchase
(c) has made a purchase, given that he/she intends to return next year
[3]
(ii) By testing the difference between the proportions of purchasers and non-
purchasers who intend to return next year, examine whether there is sufficient
evidence to justify concluding that the intention to return depends on whether
or not a purchase was made. [7]
CT3 S2005 6
(iii) Present the data as a contingency table and perform a 2 test of association
between the attributes intention to return and purchasing status . [5]
(iv) Discuss briefly the connection between the comparison of proportions carried
out in part (ii) and the test of association performed in part (iii). [2]
[Total 17]
14 The data given in the following table are the numbers of deaths from AIDS in
Australia for 12 consecutive quarters starting from the second quarter of 1983.
Quarter (i): 1 2 3 4 5 6 7 8 9 10 11 12
Number of deaths (ni): 1 2 3 1 4 9 18 23 31 20 25 37
E Ni = i 2
12 2
i 1
i ni
= 12 4
.
i 1
i
12
n
i 1 i
= 12 2
.
i 1
i
12 4 12 2
(c) Noting that i 1
i = 60, 710 and i 1
i = 650 , calculate and
for the above data.
[8]
E Ni = i
for i = 1, , 12.
E Yi = xi
(b) The least squares estimates of and are 0.6112 and 1.6008 with
standard errors 0.4586 and 0.2525 respectively (you are not asked to
verify these results).
Using the value for the estimate of , conduct a formal statistical test to
assess whether the form of the model suggested in (ii) is adequate.
[7]
[Total 19]
END OF PAPER
CT3 S2005 8
Faculty of Actuaries Institute of Actuaries
EXAMINATION
September 2005
EXAMINERS REPORT
Faculty of Actuaries
Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
150
1 (a) x 1.5
100
(b) Median is (101/2)th observation i.e. the mean of the 50th and 51st observations
so median = 1
(c) Mean is higher than the median as the data are positively skewed (skewed to
the right).
X ~ Binomial(275, 0.45)
E[X] = 275 0.45 = 123.75
V[X] = 275 0.45 0.55 = 68.0625
115.5 123.75
P( X 116) P( X 115.5) 1 1 ( 1) (1) 0.841
68.0625
120 120
3 Gamma(120, 1.2) has mean 100 and variance 83.333
1.2 1.22
X N (100,9.1292 ) by the Central Limit theorem (since the gamma variable is the
sum of 120 independent gamma(1,1.2) variables)
120 100
P X 120 P Z 2.191 1 0.98578 0.0142
9.129
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
s
95% CI is x 1.96
n
137
237 1.96 237 12.0 or (£225.0, £249.0)
500
6
Source of variation d.f. SS MSS
Between groups 3 840 280
Residual 60 660 11
Total 63 1500
1
7 (a) x (3256) 162.8
20
2 1 32562
s 866600 17711.7 s 133.1
19 20
P(premium = 400k) = P(CN in years 2/3, regardless of the first year) = p(1 p)
P(premium = 400k2) = P(NN in years 2/3, regardless of the first year) = (1 p)2
[These probabilities may be derived in other ways, such as via a tree diagram]
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
10 59 14 42
9 Pooled estimate of common population variance = 49.0833
10 14
t24 (0.025) = 2.064
10 X ~ U(0,1000) , Y = min(X,800)
P( X x and X 800)
(i) P( X x| X 800)
P ( X 800)
P( X x)
for 0 < x < 800
800 /1000
x /1000 x
for 0 x 800
800 /1000 800
(ii) E[Y] = E[X|X < 800] P(X < 800) + 800 P(X 800)
800 200
400 800
1000 1000
= 480
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
The higher value for E[Y] results from 20% of the Y values being 800 (and
80% being between 0 and 800).
[OR any equivalent allocation which reflects the probabilities of the 4 values
of N.]
12 (i) (a) The xi s are known to be such that xi 5 , therefore have density which
x
is a scaled form of e for 5 < x < .
x
The scaling constant k is such that k. e dx 1
5
x 5
k[ e ]5 1 k .e 1 k e5
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
n
xi xi
(b) L( ) e5 e n 5n
e e
i 1
log L( ) n log 5n xi
d n
log L( ) 5n xi
d
n
equate to zero for MLE n
xi 5n
i 1
10
(c) n = 10, xi = 71 0.476
71 50
5
(ii) (a) L( ) (1 e ) m (e 5
)n
5 5
log L( ) m log(1 e ) n log(e )
5
d 5me
log L( ) 5
5n
d 1 e
5
e n
equate to zero for MLE 5
1 e m
5 n 1 m n
e log( )
m n 5 n
[OR Reason via the MLE for a binomial p = P(X > 5) such that
n
p and p e 5 ]
m n
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
5
(iii) (a) (1 e )m is the likelihood of observing m policies with duration < 5
n
xi
e is the likelihood of observing the actual durations x1, , xn
i 1
and independence leads to the product of these
5
log L( ) m log(1 e ) n log xi
5
d 5me n
log L( ) 5
xi
d 1 e
The pooled estimate is between the first two (as expected, but it is
closer to 0.513).
13
purchase no purchase
return 69 68 137
no return 32 51 83
101 119 220
(ii) H0: population proportions of those who intend to return are equal
v H1: not H0
1/ 2
137 83 1 1
Estimated standard error of D = 0.06558
220 220 101 119
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
P-value = 2 P(D > 0.1117) = 2 P(Z > 0.1117/0.06558) = 2 P(Z > 1.70)
=2 (1 0.95543) = 0.08914 (i.e. 8.9%)
purchase no purchase
return 69 (62.9) 68 (74.1) 137
no return 32 (38.1) 51 (44.9) 83
101 119 220
1 1 1 1
Test statistic = 6.12 2.90
62.9 74.1 38.1 44.9
2
P-value = P 1 2.90 1 0.9114 0.0886 (i.e. 8.9%)
2
[Note: there is a formal connection: the 1 value in (iii) (2.90) is the square of
the z value in (ii) (1.70).]
Page 8
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
40
30
Number of deaths
20
10
0
0 5 10
Quarter
(b) The mean number of deaths increases with an increasing rate with
quarter.
dq
2 i 2 (ni i2 )
d
dq
0 2 i 2 (ni i2 ) 0
d
i 2 ni i4 0
i 2 ni
.
i4
d 2q
( 2
2 i4 0 minimum.)
d
Page 9
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
2
(ni i 2 )2 ni
(b) q* i
i2 i
dq* ni
2 i i
d i
dq*
0 ni i2 0
d
ni
i2
d 2 q*
( 2
2 i2 0 minimum.)
d
i 2 ni 15694
(c) 4
0.259
i 60710
ni 174
2
0.268
i 650
(iii) (a) E Ni i
[OR e and .]
H0 : = 2 v H1 : 2
2 1.6008 2
t 1.58
s.e.( ) 0.2525
Page 10
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2005 Examiners Report
Page 11
Faculty of Actuaries Institute of Actuaries
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 12 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.
Faculty of Actuaries
CT3 A2006 Institute of Actuaries
1 The stem and leaf plot below gives the surrender values (to the nearest 1,000) of 40
endowment policies issued in France and recently purchased by a dealer in such
policies in Paris. The stem unit is 10,000 and the leaf unit is 1,000.
5 3
5 6
6 02
6 5779
7 122344
7 556677899
8 1123444
8 567778
9 024
9 6
Determine the median surrender value for this batch of policies. [2]
2 In a certain large population 45% of people have blood group A. A random sample of
300 individuals is chosen from this population.
Calculate an approximate value for the probability that more than 115 of the sample
have blood group A. [3]
3 A random sample of size 10 is taken from a normal distribution with mean = 20 and
variance 2 = 1.
Find the probability that the sample variance exceeds 1, that is find P(S2 > 1). [3]
3 10
SS R ( yij yi ) 2 15,508.6
i 1 j 1
Calculate estimates for each of the parameters in the usual mathematical model, that
is, calculate , 1, 2 , 3 , and 2 . [4]
CT3 A2006 2
5 A large portfolio of policies is such that a proportion p (0 < p < 1) incurred claims
during the last calendar year. An investigator examines a randomly selected group of
25 policies from the portfolio.
(ii) Comment briefly on the above approximations, given that the exact values of
the probabilities in part (i), using the binomial distribution, are 0.9020 and
0.4207 respectively. [2]
[Total 5]
Random numbers
0.5714 , 0.8238
0.3192 , 0.6844
[6]
7 Let (X1, X2 , , Xn) be a random sample from a uniform distribution on the interval
( , ), where is an unknown positive number.
A particular sample of size 5 gives values 0.87, 0.43, 0.12, 0.92, and 0.58.
(i) Draw a rough graph of the likelihood function L( ) against for this sample.
[3]
(ii) The amounts (in units of £100) for the claims paid follow a gamma
distribution with parameters = 2 and = 1.
Calculate the expectation of the sum of the amounts for the claims paid in a
particular year. [3]
(iii) Calculate the expectation of the sum of the amounts for the claims paid in a
particular year, given that there is at least one claim paid in the year. [2]
[Total 7]
S = X1 + X2 + + XN
where N is the number of claims and has a Poisson distribution with mean , Xi is the
amount of the ith claim, and the Xi s are independent and identically distributed and
independent of N. Let MX(t) denote the moment generating function of Xi.
(i) Show, using a conditional expectation argument, that the cumulant generating
function of S, CS(t), is given by
Note: You may quote the moment generating function of a Poisson random
variable from the book of Formulae and Tables. [4]
(ii) Calculate the variance of S in the case where = 20 and X has mean 20 and
variance 10. [2]
[Total 6]
CT3 A2006 4
10 A marketing consultant was commissioned to conduct a questionnaire survey of the
clients of a financial company. The total number of respondents was 650, of whom
220 had investments above a specified threshold.
(i) Each respondent who had investments above the threshold was asked about
the percentage of these investments that was held in the form of a certain type
of trust. The respondents answered by ticking appropriate boxes and the
results led to the following frequency distribution.
(b) Calculate the mean percentage for the full set of 220 such respondents,
assuming that the frequencies in each category are uniformly spread
over the corresponding range. [5]
(ii) Calculate a 95% confidence interval for the percentage of such investors who
would have investments above the threshold. [4]
The same respondents with investments referred to in part (i) were also asked to
specify their satisfaction with the current return received from their full portfolio of
investment. This was in the form of a four-point qualitative scale: very satisfied, quite
satisfied, a little disappointed, very disappointed. The following two-way table of
frequencies was obtained.
percentage in type of trust
<10 10 25 25 50 >50
very satisfied 1 6 7 6
quite satisfied 8 29 36 27
a little disappointed 10 37 28 15
very disappointed 3 4 2 1
(iii) Calculate the expected frequencies for the above table under an appropriate
hypothesis (which should be stated) and comment on why it would be
inappropriate to carry out a 2 test directly with these data. [3]
(iv) Combining the very satisfied and quite satisfied categories together and
the a little disappointed and very disappointed categories together results
in the following reduced two-way table.
percentage in type of trust
<10 10 25 25 50 >50
satisfied 9 35 43 33
disappointed 13 41 30 16
Perform the required 2 test at the 5% level using this reduced table and
comment on your conclusion. [7]
[Total 19]
x2 x
f ( x; ) 3
exp : 0 x , 0
2
(i) Determine the variance of this distribution and calculate the coefficient of
skewness. [4]
(ii) Let X1, X2, , Xn be a random sample of n claim sizes for such claims.
X
Show that the maximum likelihood estimator (MLE) of is given by
3
and show that it is unbiased for . [5]
(b) Calculate the sample variance and comment briefly on its comparison
with the variance of the distribution evaluated at .
(iv) (a) Write down a large-sample approximate 95% confidence interval for
the mean of the distribution in terms of the sample mean x and the
sample variance s2. Hence obtain an approximate 95% confidence
interval for and evaluate this for the data in part (iii) above.
(b) Evaluate the variance of the distribution at both the lower and upper
limits of this confidence interval and comment briefly with reference to
your answer in part (iii)(b) above.
[5]
[Total 18]
CT3 A2006 6
The recorded values are:
Batch: 1 2 3 4 5 6 7 8 9 10 11 12
PRH (y): 16 68 23 35 42 41 46 48 52 50 54 53
SV (x): 0.9 1.6 2.3 2.7 3.0 3.3 3.7 3.8 4.1 4.2 4.3 4.5
(i) Draw a rough plot of the data to show the relationship between the SV and
PRH values. [2]
It is evident that one of the observations is out of line and so may have an undue
effect on any regression analysis. You are asked to investigate this as follows.
(ii) (a) Calculate the total, regression, and error sums of squares for a least-
squares linear regression analysis for predicting PRH values from SV
values using all 12 data observations.
The details of the regression analysis after removing the data for batch 2 are given in
the box below.
Analysis of Variance
Source df SS MS F p-val
Regression 1 1486.9 1486.9 165.69 0.000
Error 9 80.8 8.98
Total 10 1567.6
(iii) (a) Comment on the main differences in the results of the regression
analysis resulting from removing the data for batch 2.
(b) Calculate a 95% confidence interval for the expected (mean) PRH
value for a batch of vaccine with SV value 3.5.
[9]
[Total 22]
END OF PAPER
CT3 A2006 7
Faculty of Actuaries Institute of Actuaries
EXAMINATION
April 2006
EXAMINERS REPORT
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
M Flaherty
Chairman of the Board of Examiners
June 2006
Faculty of Actuaries
Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
Comments
Comments on answers presented by candidates are given below. Note that in some cases
variations on the solutions given are possible the examiners gave credit for all sensible
comments and correct solutions.
Question 6
This question was the worst one on the paper as regards quality of answers. The
question linked the concept of a conditional distribution with the simulation of
observations of normal random variables (Core Reading Unit 6, section 1.3 and Unit 4,
section 5.2). There were few good answers. Many candidates simply did not submit
answers, suggesting that they were not familiar with the basic approach to the
simulation of observations despite the fact that there were short questions on this
topic in both immediately previous papers, for which solutions are readily available.
Question 7
The likelihood function in this question is not of standard form and expressing and
graphing it correctly requires a good understanding of the likelihood concept. Many
candidates did not think clearly about the range of values of for which the likelihood is
positive and for which it is zero and so got the wrong graph.
Question 8
Many candidates ignored the fact that only the first three claims in any one year are
paid . Suppose Y denotes the numbers of claims which arise, then
Y ~ Poisson(0.8). Suppose X denotes the number of claims which are paid. Many
candidates worked with the set of probabilities P(X = i) = P(Y = i), i = 0,1,2,3.
But these four probabilities do not sum to 1 and so do not provide a proper probability
distribution for X. What is required is the set of four probabilities
P(X = i) = P(Y = i), i = 0,1,2 together with P(X = 3) = P(Y 3).
Question 9
The wording of the question made it clear that candidates could assume the mgf of a
Poisson random variable and, armed with this information, should use a conditional
expectation argument . Full marks were not awarded to candidates who jumped into
the middle of the argument by assuming the mgf of a compound Poisson random
variable.
Question 10
Candidates should be aware that when constructing a histogram with unequal group
widths one must ensure that the areas (and not the heights) of the rectangles are
proportional to the frequencies.
In part (ii), many candidates calculated a confidence interval for a different proportion
to the one asked for.
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
Question 11
Many candidates were unsure of the definition of the coefficient of skewness (Core
Reading Unit 3, section 3.4).
Question 12
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
2 If X is the number in the sample with group A, then X has a binomial (300, 0.45)
distribution, so
E[X] = 300 0.45 = 135 and Var[X] = 300 0.45 0.55 = 74.25.
115.5 135
P(X > 115) = P(X > 115.5) 1 =1 ( 2.26) = (2.26) = 0.99.
74.25
n 1 S2
3 2
~ 2
n 1 so here 9S 2 ~ 2
9
P S2 1 P 2
9 9
1
4 (276.7 254.6 296.3) 275.87
3
1 276.7 275.87 0.83
2 254.6 275.87 21.27
3 296.3 275.87 20.43
2 SS R 15508.6
574.4
27 27
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
[Note: candidates may also comment on the fact that the sample size 25 is not
large and so we would not expect the Poisson approximations to be very
good anyway. In fact the key to the approximations is the small p and here the
given approximations are quite good]
n n
1 1
7 (i) L( ) c for < xi < , i = 1, 2, , n and L( ) = 0 otherwise
2
0
0 0.92
(ii) The maximum value of L( ) is attained at the largest absolute value of the
data. The ML estimate of is 0.92.
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
8 (i) By subtraction using entries in tables for Poisson(0.8), the probabilities for the
Poisson distribution for 0, 1, 2 and 3 are: [or by evaluation]
0.44933, 0.35946, 0.14379 and (1 0.95258) = 0.04742
(ii) Let N = number of claims paid and let X1, , Xn be the claim amounts then
S = Xi is the sum of the amounts.
E[S] = E[N]E[X]
(iii) Given that N > 0, divide the probabilities in part (i) by (1 0.44933) =
0.55067 to give the probabilities for 1, 2 and 3 claims paid as:
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
10 (i) (a) The key feature of the histogram is that the areas of the four rectangles
should be proportional to the frequencies.
x 5 17.5 37.5 75
f 22 76 73 49
7852.5
f = 220, fx = 7852.5 x 35.7%
220
220
(ii) Estimated proportion is p 0.338 (or 33.8%)
650
p (1 p )
p 1.96
650
0.338(0.662)
0.338 1.96 0.338 0.036
650
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
(iii) Under the null hypothesis of no association between percentage in type of trust
and satisfaction with current return, expected frequencies are
table of residuals (o e) is
table of contributions to 2 is
2
3 (5%) 7.815 must accept the null hypothesis that there is no
relationship between percentage in type of trust and satisfaction with current
return.
However this decision to accept is marginal at the 5% level and there is some
evidence, but not strong, to suggest that satisfaction improves as the
percentage increases.
Page 8
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
= E[X 3] 3 E[X2] + 2 3
3
3 6
coefficient of skewness = 3
1.155
2 3
( 3 )
n
xi2 xi xi2 xi
(ii) L( ) 3
exp( ) n 3n
exp
i 1 2 2
xi
log L( ) log( xi2 ) n log 2 3n log
3n xi
log L( ) 2
3n xi xi
equate to zero: 2 3n
2
this clearly maximises L( ) [or consider 2
log L( ) ]
Xi X
So MLE is
3n 3
1 1 1
E E X E X 3 unbiased
3 3 3
313.6 6.272
(iii) (a) x 6.272 2.091
50 3
1 313.62
(b) s2 (2675.68 ) 14.465
49 50
2 2 2
3 and 3 13.117
Page 9
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
(c) sample coefficient 1.149 is very close to the distribution value 1.155
s2
(iv) (a) approximate 95% CI for is x 1.96
n
1 14.465
for data: 6.272 1.96
3 50
12 (i)
70
60
50
PRH
40
30
20
1 2 3 4
SV
Page 10
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2006 Examiners Report
1/ 2
1643.8 /10
(d) s.e. b 3.3928
14.28
The fit of the linear regression model is much improved (R2 is much
increased from 25.1% to 94.9%).
Sxx = 11.4873
1/ 2
2
1 3.5 36.8 /11
s.e. of estimation = 8.98 0.9138
11 11.4873
t9(0.025) = 2.262
Page 11
Faculty of Actuaries Institute of Actuaries
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 12 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.
Faculty of Actuaries
CT3 S2006 Institute of Actuaries
1 A bag contains 8 black and 6 white balls. Two balls are drawn out at random, one
after the other and without replacement.
(ii) The first ball drawn out was white, given that the second ball drawn out is
black. [2]
[Total 3]
Show that A and B , the complement of event B, are also independent events. [3]
Find the probability that no claims arise on the group of policies numbered 1, 2, 3, 4,
5 and 6, and exactly 1 claim arises in total on the group of policies numbered 7, 8, 9,
10, 11, and 12. [3]
4 In a large portfolio 65% of the policies have been in force for more than five years.
An investigation considers a random sample of 500 policies from the portfolio.
Calculate an approximate value for the probability that fewer than 300 of the policies
in the sample have been in force for more than five years. [3]
5 In a random sample of 200 policies from a company s private motor business, there
are 68 female policyholders and 132 male policyholders.
Let the proportion of policyholders who are female in the corresponding population of
all policyholders be denoted .
stating clearly the approximate probability value of the observed statistic and your
conclusion. [4]
CT3 S2006 2
6 It is assumed that claims arising on an industrial policy can be modelled as a Poisson
process at a rate of 0.5 per year.
(i) Determine the probability that no claims arise in a single year. [1]
(ii) Determine the probability that, in three consecutive years, there is one or more
claims in one of the years and no claims in each of the other two years. [2]
(iii) Suppose a claim has just occurred. Determine the probability that more than
two years will elapse before the next claim occurs. [2]
[Total 5]
7 A commuter catches a bus each morning for 100 days. The buses arrive at the stop
according to a Poisson process, at an average rate of one per 15 minutes, so if Xi is the
waiting time on day i, then Xi has an exponential distribution with parameter 1 so
15
(i) Calculate (approximately) the probability that the total time the commuter
spends waiting for buses over the 100 days exceeds 27 hours. [3]
(ii) At the end of the 100 days the bus frequency is increased, so that buses arrive
at one per 10 minutes on average (still behaving as a Poisson process). The
commuter then catches a bus each day for a further 99 days. Calculate
(approximately) the probability that the total time spent waiting over the
whole 199 days exceeds 40 hours. [3]
[Total 6]
W X1 (1 )X2
(iii) Show that the value of for which W has minimum mean square error is
given by
2
2
2 2
,
1 2
(iv) Consider the special case when the variances of the two random samples are
equal to a common value 2 . State (do not derive) the maximum likelihood
estimator of calculated from the combined samples, and compare it with the
estimator obtained in (iii). [2]
[Total 8]
(ii) Suppose that a random variable X has a standard normal distribution, and the
conditional distribution of a Poisson random variable Y, given the value of
X = x, has expectation g(x) = x2 + 1.
CT3 S2006 4
10 Let (X1, X2, , Xn) be a random sample of a gamma(4.5, ) random variable, with
sample mean X .
2
(i) (a) Using moment generating functions, show that 2 nX ~ 9n .
(b) Construct a 95% confidence interval for , based on X and the result
in (i)(a) above.
(c) Evaluate the interval in (i)(b) above in the case for which a random
sample of 10 observations gave a value xi 21.47 [9]
4.5
.
X
1/ 2
.
4.5n
The following values (in units of £1,000 and rounded to 2 decimal places) are the
maturity values for such investments for 8 high street banks and 12 other banks (i.e.
those without high street branches).
High street banks (x1): 11.91, 11.87, 11.83, 11.66, 11.53, 11.49, 11.49, 11.42
Other banks (x2): 12.23, 12.17, 12.16, 11.90, 11.82, 11.77, 11.74, 11.70, 11.64, 11.60,
11.55, 11.50
(i) Draw a diagram in which the maturity values for high street and other banks
may be compared. [2]
(ii) Calculate a 95% confidence interval for the difference between the means of
the maturity values for high street and other banks, and comment on any
implications suggested by the interval. [6]
(iii) (a) Show that a test of the equality of variances of maturity values for high
street banks and other banks is not significant at the 5% level.
(b) Comment briefly on the validity of the assumptions required for the
interval in (ii). [4]
The following values (in units of £1,000 and rounded to 2 decimal places) are the
maturity values for the maximum possible investment for a random sample of 12
building societies (a different kind of financial institution).
Building societies (x3): 12.40, 12.19, 12.06, 12.01, 12.00, 11.97, 11.94, 11.92, 11.88,
11.86, 11.81, 11.79
(iv) Add further points to your diagram in part (i) such that the maturity values for
all three types of financial institution may be compared. [1]
(v) Use one-way analysis of variance to compare the maturity values for the three
different types of financial institution, and comment briefly on the validity of
the assumptions required for analysis of variance. [6]
(vi) Interpret the results of the statistical analyses conducted in (ii) and (v). [2]
[Total 21]
CT3 S2006 6
12 A development engineer examined the relationship between the speed a vehicle is
travelling (in miles per hour, mph), and the stopping distance (in metres, m) for a new
braking system fitted to the vehicle. The following data were obtained in a series of
independent tests conducted on a particular type of vehicle under identical road
conditions.
(ii) Calculate the equation of the least-squares fitted regression line. [5]
(iii) Calculate a 95% confidence interval for the slope of the underlying regression
line, and use this confidence interval to test the hypothesis that the slope of the
underlying regression line is equal to 1. [5]
(iv) Use the fitted line obtained in part (ii) to calculate estimates of the stopping
distance for a vehicle travelling at 50 mph and for a vehicle travelling at 100
mph.
END OF PAPER
CT3 S2006 7
Faculty of Actuaries Institute of Actuaries
EXAMINATION
September 2006
EXAMINERS’ REPORT
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
M A Stocker
Chairman of the Board of Examiners
November 2006
© Faculty of Actuaries
© Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
Comments
Comments on answers presented by candidates are given below. Note that in some cases
variations on the solutions given are possible — the examiners gave credit for all
sensible comments and correct solutions.
The most common problems noted by the examiners are summarised below.
Some candidates were unsure of basic concepts in probability (such as the independence
of two events) and gave poor answers to Questions 2 and 3.
Question 5
Many candidates used πˆ = 0.34 (wrongly) rather than π = 0.4 (correctly) in the
expression for the standard error of the estimate (the sample proportion) under H0.
However, it makes little difference numerically, and the examiners were generous on this
point when marking.
Question 7
was poorly attempted, with many candidates failing to realise that the distribution of the
total waiting time can be approximated by a normal distribution, by virtue of the central
limit theorem.
Question 8
Some candidates did not know the result on the variance of the mean of a random
σ2
sample of size n, namely Var ⎡⎣ X ⎤⎦ = .
n
Question 9
Some candidates displayed a lack of familiarity with the use of conditional expectations,
and in particular with the application of the result
Question 10
Some candidates did not know that the asymptotic standard error of a maximum
likelihood estimator is found from evaluating 1/ I , where
⎡ d 2A ⎤
I = E ⎢ − 2 ⎥ and A ( λ ) is the log-likelihood.
⎣ dλ ⎦
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
Question 11
s12
In the part on equality of variances (part (iii)(a)) some candidates who worked with
s22
(= 0.607) did not know how to find the lower 2.5% point of F7,11 (which is the reciprocal
of the upper 2.5% point of F11,7 , and is approximately
1/4.71 = 0.212).
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
(
Noting that ( B ) = B , it follows immediately that P ( A ) = P ( A | B ) = P A | ( B ) )
and so A and B are independent.
[OR
Thus,
P(X < 300) becomes P(X < 299.5) using continuity correction
299.5 − 325
P( Z < ) where Z ~ N(0,1)
10.665
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
5 Under H0: sample proportion P is approximately normally distributed with mean 0.4
and standard error (0.4×0.6/200)1/2 = 0.03464
⎛ 0.34 − 0.4 ⎞
= P⎜Z < ⎟ = P ( Z < −1.732 ) = 0.042
⎝ 0.03464 ⎠
[OR This is actually better - working with the number of female policyholders
(observed = 68), the P-value is
⎛ 68.5 − 80 ⎞
P⎜Z < = −1.660 ⎟ = 0.048 ]
⎜ 200(0.4)(0.6) ⎟
⎝ ⎠
Note: We can word the conclusion: we reject H0 at levels of testing down to 4.2% (or
4.8%) and conclude …
7 (i) As stated in the question, if Xi is the waiting time on day i, then Xi has an
exponential distribution with parameter 1 so E(Xi) = 15, Var(Xi) = 152 = 225.
15
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
(ii) If Yj is the waiting time on day j of the extra 99 days, then E(Yj) = 10 and
∑ j =1Y j
99
Var(Yj) = 100 so that if Y = is the total waiting time over the 99 days,
then Y is approximately N(990,9900) by CLT.
If Z = X + Y (so that Z is the total waiting time over the whole 199 days), then
since X and Y are independent, Z is approximately N(1500+990, 22500+9900),
i.e. N(2490, 32400).
⎛ 2400 − 2490 ⎞
Hence P(Z > 2400) ≈ 1 − Φ ⎜ ⎟ = 1 − Φ(−0.5) = Φ(0.5) = 0.6915.
⎝ 180 ⎠
8 (i) E (W ) = E (αX1 + (1 − α) X 2 )
= αE ( X1 ) + (1 − α ) E ( X 2 ) = αμ + (1 − α )μ = μ
Therefore W is unbiased.
W is unbiased
∴ MSE(W) = var(W)
= var(αX1 + (1 − α ) X 2 )
σ12 σ2
= α2 + (1 − α) 2 2
n n
dMSE σ2 σ2
(iii) = 2α 1 − 2(1 − α) 2
dα n n
dMSE
= 0 ⇒ (σ12 + σ22 )α = σ22
dα
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
σ22
∴ α=
σ12 + σ 22
d 2 MSE σ12 σ2
=2 + 2 2 > 0 ∴ minimum
d α2 n n
sum of observations nX + nX 2
μˆ = = 1
number of observations 2n
1 1
= X1 + X 2
2 2
σ22 σ2 1 1 1
α= = = ⇒ W = X1 + X 2 .
σ12 + σ 22 2
σ +σ 2 2 2 2
Thus Var[Y] = 2 + 1 + 1 = 4
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
n
10 (i) (a) Mgf of Xi is (1 – t/λ)−4.5 so mgf of ∑ Xi is
i =1
n
∏ (1 − t / λ )
−4.5 −4.5n
= (1 − t / λ )
i =1
n
Hence mgf of 2λ ∑ X i = 2λnX is (1 − 2λt / λ )
−4.5n −4.5 n
= (1 − 2t )
i =1
⎛ a b ⎞
(b) P ( a < 2λnX < b ) = 0.95 ⇒ P ⎜ <λ< ⎟ = 0.95
⎝ 2nX 2nX ⎠
( )
P χ92n < a = 0.025 and P χ92n > b = 0.025. ( )
⎛ a b ⎞
so a 95% CI for λ is given by ⎜ , ⎟.
⎝ 2nX 2nX ⎠
(c) 9n = 90, and from tables of χ2 with 90df we have a = 65.65, b = 118.1
⎛ 65.65 118.1 ⎞
CI is ⎜ , ⎟ = (1.53 , 2.75).
⎝ 2 × 21.47 2 × 21.47 ⎠
dA dA 4.5n 4.5
⇒ = 4.5n / λ − ∑ xi Setting = 0 ⇒ λˆ = =
dλ dλ ∑ Xi X
d 2A λˆ
(b) − = 4.5n / λ 2 so s.e.(λˆ ) ≅
dλ 2
( 4.5n )1/ 2
(c) {
95% CI is λˆ ± 1.96 × s.e. λˆ ( )}
In the case n = 100, Σx = 225.3,
Page 8
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
4.5 / 2.253
λˆ = 4.5 / 2.253 = 1.9973 and s.e.(λˆ ) ≅ = 0.0942
( 450 )1/ 2
so CI is 1.9973 ±(1.96 × 0.0942) i.e. (1.81 , 2.18).
11 (i) Maturity values for high street banks and other banks
High street
Other banks
93.20
x1 = = 11.650
8
141.78
x2 = = 11.815
12
1⎛ 93.202 ⎞
s12 = ⎜ 1086.0470 − ⎟ = 0.038143
7 ⎜⎝ 8 ⎟⎠
1⎛ 141.782 ⎞
s22 = ⎜ 1675.8224 − ⎟ = 0.062882
11 ⎜⎝ 12 ⎟⎠
Pooled estimate of σ:
∴ s p = 0.2308
1 1
11.650 − 11.815 ± t18 (2½%) s p +
8 12
1 1
= −0.165 ± (2.101)(0.2308) +
8 12
Page 9
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
i.e. the confidence interval for the difference between the means for high street
banks and other banks (μ1 − μ2) is −£386 to £56.
S 22
(iii) (a) ~ F11,7
S12
under the assumption that the variances are equal for high street and
other banks,
s22 0.062882
= = 1.65
s12 0.038143
[OR probability value is p > 0.20 as a two-sided 20% level test has a
critical value of approximately 2.69.]
(b) The plot in (i) indicates that the assumption of a normal distribution for
maturity values is reasonable (but small samples) for both high street
and other banks. The assumption of equal variance also seems valid as
the test in (iii)(a) is not significant (and the plot above supports this).
Maturity values
High street
Other banks
Building soc
Page 10
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
378.812
SST = 4486.114 − = 1.832
32
0.276
F= = 6.27 on (2, 29) degrees of freedom
0.044
(vi) Part (ii) indicates that there are no differences between the mean maturity
values of the two types of bank, but (v) indicates that there are differences
between the mean maturity values of the 3 types of financial institution.
Therefore, in conclusion, it seems that the mean maturity value for building
societies is not equal to the mean maturity values of the banks. Also, the plot
in (iv) suggests that the maturity value for building societies is higher than the
mean maturity values for the banks.
Page 11
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
12 (i)
80
70
Stopping distance
60
50
40
30
20
10
0
10 20 30 40 50 60 70
Speed
(ii) n=7
Model: E[Y] = α + βx
S xy 3150
Slope: βˆ = = = 1.125
S xx 2800
Page 12
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2006 — Examiners’ Report
1 ⎛ S2 ⎞ 1⎛ (3150) 2 ⎞
(iii) σˆ 2 = ⎜ S yy − xy ⎟ = ⎜ 3653.714 − ⎟ = 21.99
n−2⎜ S xx ⎟ 5 ⎜⎝ 2800 ⎟⎠
⎝ ⎠
σˆ 2 21.99
s.e.( β̂ ) = = = 0.0886
S xx 2800
β = 1 is within this 95% confidence interval, therefore we would not reject the
null hypothesis β = 1 at the 5% significance level.
The stopping distance of 45.7 m when the speed is 50 mph can be regarded as
a reliable estimate as x = 50 is well within the range of the x data values.
However, the stopping distance for a speed of 100 mph may be unreliable as
x = 100 is outside the range of the data and involves extrapolation.
Page 13
Faculty of Actuaries Institute of Actuaries
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 13 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.
© Faculty of Actuaries
CT3 A2007 © Institute of Actuaries
1 Consider the following two random samples of ten observations which come from the
distributions of random variables which assume non-negative integer values only.
Sample 1: 7 4 6 11 5 9 8 3 5 5
sample mean = 6.3, sample variance = 6.01
Sample 2: 8 3 5 11 2 4 6 12 3 9
sample mean = 6.3, sample variance = 12.46
One sample comes from a Poisson distribution, the other does not.
State, with brief reasons, which sample you think is likely to be which. [2]
2 A random sample of 200 policy surrender values (in units of £1,000) yields a mean of
43.6 and a standard deviation of 82.2.
Determine a 99% confidence interval for the true underlying mean surrender value for
such policies. [3]
3 It is assumed that claims on a certain type of policy arise as a Poisson process with
claim rate λ per year.
For a group of 150 independent policies of this type, the total number of claims during
the last calendar year was recorded as 123.
Determine an approximate 95% confidence interval for the true underlying annual
claim rate for such a policy. [4]
4 The sample correlation coefficient for the set of data consisting of the three pairs of
values
is 0.982. After the x and y values have been transformed by particular linear functions,
the data become:
State (or calculate) the correlation coefficient for the transformed data. [2]
CT3 A2007—2
5 The number of claims arising in one year from a group of policies follows a Poisson
distribution with mean 12. The claim sizes independently follow an exponential
distribution with mean £80 and they are independent of the number of claims.
Calculate the mean and the standard deviation of the total claim amount which arises
during this remaining six months. [4]
4
f ( x) = , x = 0, 1, 2, ...
5 x +1
(i) Show that the moment generating function of the distribution of X is given by
M X (t ) = 4(5 − et ) −1 ,
(ii) Determine E[X] using the moment generating function given in part (i). [3]
[Total 6]
7 A charity issues a large number of certificates each costing £10 and each being
repayable one year after issue. Of these certificates, 1% are randomly selected to
receive a prize of £10 such that they are repaid as £20. The remaining 99% are repaid
at their face value of £10.
(i) Show that the mean and standard deviation of the sum repaid for a single
purchased certificate are £10.1 and £0.995 respectively. [2]
(ii) Calculate approximately the probability that this person is repaid more than
£2,040 by using the Central Limit Theorem applied to the total sum repaid.
[3]
(iv) Comment briefly on the comparison of the two approximations above given
that the exact probability using the binomial distribution is 0.0517. [1]
[Total 9]
α
f ( x) = , 0< x<∞
(1 + x)α+1
(i) Show by evaluating the appropriate integral that, in the case α > 1, the mean
1
of this distribution is given by .
α −1
[Hint: when integrating, write x = (1 + x) - 1 and exploit the fact that the
integral of a density function is unity over its full range.] [3]
9 Consider three random variables X, Y, and Z with the same variance σ2 = 4. Suppose
that X is independent of both Y and Z, but Y and Z are correlated, with correlation
coefficient ρYZ = 0.5.
10 A random sample of insurance policies of a certain type was examined for each of
four insurance companies and the sums insured (yij, for companies i = 1, 2, 3, 4)
under each policy are given in the table below (in units of £100):
Company Total
CT3 A2007—4
Consider the ANOVA model Yij = μ + τi + eij , i = 1,..., 4, j = 1,..., ni , where Yij is the jth
sum insured for company i, ni is the number of responses for company i,
∑ i=1 ni τi = 0 .
4
eij ~ N (0, σ2 ) are independent errors, and
(ii) Test the hypothesis that there are no differences in the means of the sums
insured under such policies by the four companies. [5]
[Total 8]
11 The number of claims, X, which arise in a year on each policy of a particular class is
to be modelled as a Poisson random variable with mean λ. Let X = (X1, X2, …, Xn) be
1 n
a random sample of size n from the distribution of X, and let X = ∑ X i .
n i =1
(ii) Derive the Cramer-Rao lower bound (CRlb) for the variance of unbiased
estimators of λ. [4]
(iii) (a) Show that λ̂ is unbiased for λ and that it attains the CRlb.
(b) Explain clearly why, in the case that n is large, the distribution of λ̂ can
be approximated by
⎛ λ⎞
λˆ ~ N ⎜ λ, ⎟ .
⎝ n⎠
[3]
(iv) (a) Show that, in the case n = 100, an approximate 95% confidence
interval for λ is given by
x ± 0.196 x .
(b) Evaluate the confidence interval in (iv)(a) based on a sample with the
following composition:
observation 0 1 2 3 4 5 6 7
frequency 11 28 19 28 9 2 2 1
[6]
[Total 16]
A: 4.6 6.6 2.8 5.8 2.1 5.2 5.9 3.4 7.8 3.5 1.6 8.6 2.7
B: 5.7 3.4 4.7 3.6 6.5 3.3 3.8 2.4 7.0 4.0 4.4
(i) Draw a suitable diagram to represent these data so that the initial estimates of
the two assessors can be compared. [2]
(ii) You are required to perform an appropriate test to compare the means of the
assessors’ initial estimates for this type of water damage.
(b) Use your diagram in part (i) to comment briefly on the validity of your
test.
(c) Calculate your test statistic and specify the resulting P-value.
(iii) You are required to perform an appropriate test to compare the variances of
the assessors’ initial estimates.
(b) Use your diagram in part (i) to comment briefly on the validity of your
test.
(c) Calculate your test statistic and specify the resulting P-value.
(d) State your conclusion clearly and hence comment further on the
validity of your test in part (ii).
[7]
(iv) Use your answers in parts (i) to (iii) to comment on the overall comparison of
the two assessors as regards their initial estimates for this type of water
damage. [1]
[Total 20]
CT3 A2007—6
13 In a study of the relation between the amount of information available and use of
buses in eight comparable test cities, bus route maps were given to residents of the
cities at the beginning of the test period. The increase in average daily bus use during
the test period was recorded. The numbers of maps and the increase in bus use are
given in the table below (both in thousands).
Number of maps (x) 80 220 140 120 180 100 200 160
Increase in bus use (y) 0.60 6.70 5.30 4.00 6.55 2.15 6.60 5.75
(ii) The equation of the fitted linear regression is given by y = −1.816 + 0.04348 x .
Perform an appropriate statistical test to assess the hypothesis that the slope in
this fitted model suggests no relationship between the increase in bus use and
the number of maps distributed. Any assumptions made should be clearly
stated. [6]
(iii) The fitted responses and the residuals from the linear regression model fitted
in part (ii) are given below:
Fitted values ( yˆ ) 1.66 7.75 4.27 3.40 6.01 2.53 6.88 5.14
Residuals (eˆ) -1.06 -1.05 1.03 0.60 0.54 -0.38 -0.28 0.61
Plot the residuals against the values of the fitted responses and comment on
the adequacy of the model. [4]
(iv) A new city is added to the study, and 250,000 maps are distributed to its
citizens.
Calculate the prediction of the increase in bus use in this city according to the
model fitted in part (ii) and comment on the validity of this prediction. [2]
[Total 16]
END OF PAPER
CT3 A2007—7
Faculty of Actuaries Institute of Actuaries
EXAMINATION
April 2007
EXAMINERS’ REPORT
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
M A Stocker
Chairman of the Board of Examiners
June 2007
Comments
Comments are given in the solutions that follow. Note that in some cases variations on the
solutions given are possible — the examiners gave credit for all sensible comments and
correct solutions.
The paper was well-answered overall and there are no particular topics that stand out as being
poorly attempted. Similarly there were no particular misunderstandings evident widely, and
no particular errors were made repeatedly and are worthy of comment.
In Question 13(iii) candidates were asked to plot a given set of residuals and comment. There
was in fact a negative sign missing from the first residual (quoted as 1.6). The error was
noted before marking commenced. No candidate was disadvantaged — all answers using
1.06 or -1.06 were accepted as being equally valid. There was no evidence in the scripts of
any problem for candidates. The examiners wish to apologise for the minor error.
© Faculty of Actuaries
© Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
1 A Poisson random variable has mean = variance and this will be reflected in the
sample mean and variance for a random sample.
Sample 2 has a very much higher variance than mean, whereas sample 1 has mean
and variance approximately the same, so sample 1 is likely to be the one which comes
from a Poisson distribution.
s
x ± zα / 2
n
82.2
leading to 43.6 ± 2.5758 ⇒ 43.6 ± 15.0
200
123
3 The mean number of claims per policy is X = = 0.82
150
X
approximate 95% confidence interval for λ is X ± 1.96
n
0.82
→ 0.82 ± 1.96 → 0.82 ± 1.96(0.0739)
150
4 Answer = −0.982
(The relationship is now a negative one; the only change is the sign. An answer of
+0.982 gets 1 mark.)
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
Then N ~ Poisson(6)
E ( S ) = E ( N ) E ( X ) = (6)(80) = £480
∴ sd ( S ) = £277
6 (i) M X (t ) = E[etx ]
∞ x
4 ∞ ⎛ et ⎞
x
4⎛1⎞
= ∑e ⎜ ⎟ =tx
∑ ⎜⎜ ⎟⎟ ,
x =0
5⎝5⎠ 5 x =0 ⎝5 ⎠
( )
4 1 −1
M X (t ) = = 4 5 − et .
5 1 − et
5
( )
−2
(ii) M '(t ) = 4et 5 − et
( )
−2 1
∴ E[ X ] = 4e0 5 − e0 = .
4
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
2040 − 2020
P ( S > 2040) = P( Z > = 1.42)
14.07
= 1 − 0.9222 = 0.0778
= 1 − P( N ≤ 4) = 1 − 0.94735 = 0.0527
(iv) Clearly the Poisson approximation to the binomial is better than the Central
Limit Theorem approximation.
OR:
Since S is discrete and increases in steps of 10, one can argue for the use of a
continuity correction in (ii) above:
⎛ 2045 − 2020 ⎞
P ( S > 2040 ) = P ⎜ Z ≥ ⎟ = P ( Z > 1.78 )
⎝ 14.07 ⎠
= 1 − 0.96246 = 0.0375
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
∞
α
8 (i) Mean = ∫ x (1 + x)α+1 dx
0
∞ ∞
α α
= ∫ (1 + x) (1 + x) α+1
dx − ∫ 1
(1 + x)α+1
dx
0 0
∞
α (α − 1)
= ∫
α − 1 (1 + x)(α−1)+1
dx − 1
0
α 1
= −1 =
α −1 α −1
1
(ii) Equate population mean to sample mean: =x
α −1
1 1
Solve to get α = 1 + , so MME = 1 +
x X
[Note: The simple statement of the answer “0” is acceptable for the single
mark available.]
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
871.9
10 (i) μˆ = Y.. = = 54.494
16
284.5 871.9
τˆ1 = Y1. − Y.. = − = 2.406
5 16
223.1 871.9
τˆ 2 = Y2. − Y.. = − = 1.281
4 16
159.8 871.9
τˆ 3 = Y3. − Y.. = − = −1.227
3 16
204.5 871.9
τˆ 4 = Y4. − Y.. = − = −3.369
4 16
Y..2
(ii) SST = ∑∑ yij2 − = 120.430
i j n
SS R = SST − SS B = 35.002
Source DF SS MS F
Company (between treatments) 3 85.428 28.476 9.763
Residual 12 35.002 2.917
Total 15 120.430
Since F = 9.763 > 3.490, there is evidence against the null hypothesis, and we
conclude that there are differences in the mean sums insured by the
companies.
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
e − nλ λ ∑ xi
11 (i) L( x) =
∏ xi !
⇒
d
= −n +
∑ xi = 0 ⇒ λˆ = ∑ Xi = X
dλ λ n
(ii)
d2
=−
∑ xi
d λ2 λ2
⎡ d2 ⎤ 1 nλ n
⇒ − E ⎢ 2 ⎥ = 2 E ⎡⎣ ∑ X i ⎤⎦ = 2 =
⎢⎣ d λ ⎥⎦ λ λ λ
λ
⇒ CRlb = .
n
V [X ] λ
V ⎡⎣λˆ ⎤⎦ = V ⎡⎣ X ⎤⎦ = = ,which is CRlb.
n n
(b) The theory of asymptotic distributions of MLEs (and in this case the
⎛ λ⎞
CLT) gives λˆ ~ N approximately, for large n so λˆ ~ N ⎜ λ, ⎟ ,
⎝ n⎠
approximately.
(
λˆ ± 1.96 × s.e. λˆ( )) i.e. x ± (1.96 × s.e. ( x ) )
()
s.e. λˆ =
λ
n
which we can estimate by using x to estimate λ, giving
⎛ x ⎞
x ± ⎜⎜ 1.96 × ⎟ i.e. x ± 0.196 x .
⎝ 100 ⎟⎠
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
12 (i)
(ii) (a) Let μA = mean initial estimate for this type of water damage for
assessor A and μB = mean initial estimate for this type of water damage
for assessor B.
H0 : μA = μB v H1 : μA ≠ μB
x A − xB
(c) test statistic is t = ∼ tnA + nB −2 under H0
1 1
sp +
n A nB
60.6 1 60.62
From data: x A = = 4.662 , s 2A = (340.92 − ) = 4.8692
13 12 13
48.8 1 48.82
xB = = 4.436 , sB2 = (236.80 − ) = 2.0305
11 10 11
12(4.8692) + 10(2.0305)
and s 2p = = 3.5789 ∴ s p = 1.8918
22
Page 8
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
s 2A
(c) test statistic is F = ∼ Fn A −1,nB −1 under H0
sB2
4.8692
observed F = = 2.40 on 12,10 df
2.0305
(iv) Overall there is no real evidence to distinguish any differences in the initial
estimates for this type of water damage for the two assessors A and B.
Page 9
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
6
5
4
trips
3
2
1
maps
The plot suggests that there is a positive relationship between the increase in
bus use and the number of maps distributed. The increase seems to be
reasonably linear up to around 180000 maps, after which point it seems to
level off (overall, relationship seems curved, possibly quadratic).
1 ⎛⎜ S xy2 ⎞ 1 ⎛ 2⎞
⎟ = ⎜ 36.29719 − (730.5) ⎟ = 0.75558
σ̂ =2
S yy −
n − 2 ⎜⎝ S xx ⎟⎠ 6 ⎜⎝ 16800 ⎟⎠
σˆ 2 0.75558
s.e.( β̂ ) = = = 0.006706
S xx 16800
βˆ − 0 0.04348
= = 6.484 ,
s.e.(βˆ ) 0.006706
and under the assumption that the errors of the regression are i.i.d. N (0, σ2 )
random variables, it has a t distribution with n - 2 = 6 df.
Page 10
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2007 — Examiners’ Report
0.0
-0.5
-1.0
2 3 4 5 6 7
Fitted
Negative residuals are associated with the fitted values at the two ends of the
data set, suggesting that the model is inadequate. Pattern suggests that a
quadratic model might be appropriate.
This uses extrapolation on the fitted regression line. The prediction is probably
not valid, especially as the linear model does not seem adequate.
Page 11
Faculty of Actuaries Institute of Actuaries
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 13 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.
© Faculty of Actuaries
CT3 S2007 © Institute of Actuaries
1 Data collected on claim amounts (£) for two postcode regions give the following
values for n (the number of claims), x (the mean claim amount) and s (the sample
standard deviation) of the claim amounts.
Region 1 Region 2
n 25 18
x 120.2 142.7
s 58.1 62.2
Calculate, to one decimal place, the mean and sample standard deviation of the claim
amounts for both regions combined. [4]
2
f ( x) = , x >1
x3
⎧0, x <1
⎪
F ( x) = ⎨ 1 .
⎪1 − 2 , x ≥1
⎩ x
3 It is known that 24% of the customers in a bank holding a current account also have
another type of account with the bank.
Calculate an approximate value for the probability that fewer than 50 customers in a
random sample of 250 customers with a current account also have another type of
account. [3]
4 In a random sample of 200 policies from a company’s private motor business, there
are 68 female policyholders and 132 male policyholders.
CT3 S2007—2
5 For a particular insurance company a sample of eight claim amounts (in units of
8
£1,000) on household contents is taken. The data give ∑ xi = 56.7 and
i =1
8
∑ xi2 = 403.95 . The claim amounts are assumed to follow a normal distribution.
i =1
(i) Calculate a 90% confidence interval for the true mean claim amount. [3]
(ii) Use the confidence interval calculated in (i) above to comment on an expert’s
assessment that the average claim amount for the company is £6,500. [1]
[Total 4]
H0 : ρ = 0 v H1 : ρ > 0.
Use the t distribution to determine an upper critical value for the sample correlation
coefficient r for this test at the 1% level. [4]
7 Let N denote the number of claims which arise in a portfolio of business and let Xi be
the amount of the ith claim. Let each of the Xi’s be independently modelled as a
normal variable with mean £10,000 and standard deviation £2,000 and let N be
independently modelled as a Poisson variable with parameter 20.
Calculate the mean and standard deviation of the total claim amount S = X1+…+XN.
[3]
8 Claim sizes in a certain insurance situation are modelled by a normal distribution with
mean μ = £30,000 and standard deviation σ = £4,000 The insurer defines a claim to
be a large claim if the claim size exceeds £35,000.
(ii) Calculate the probability that the size of a large claim (as defined by the
insurer) exceeds £36,000. [2]
(iii) Calculate the probability that a random sample of 5 claims includes 2 which
exceed £35,000 and 3 which are less than £35,000. [2]
[Total 6]
(i) Determine approximately the probability that at least 139 of the policies in the
sample will each give rise to any claims. [4]
(ii) Suppose we do observe that 139 policies in our sample give rise to at least one
claim. Use your answer to part (i) to determine whether this suggests at the
1% level of significance that the probability of any claims arising from a
policy of this certain class is greater than initially believed. [3]
[Total 7]
10 A chi-square test of association for the frequency data in the following 2 × 3 table
Factor A
A1 A2 A3
B1 40 30 50
Factor B
B2 80 30 70
produces a chi-square statistic with value 4.861 and associated P-value 0.089.
Consider a chi-square test of association for the data in the following 2 × 3 table, in
which all frequencies are twice the corresponding frequencies in the first table:
Factor A
A1 A2 A3
B1 80 60 100
Factor B
B2 160 60 140
(i) State, or calculate, the value of the chi-square test statistic for the second table.
[2]
(ii) Find the P-value associated with the test statistic in (i). [1]
CT3 S2007—4
11 Suppose that the random variable X follows an exponential distribution with
probability density function
(b) Explain how you would simulate a value of Y given a value u from the
uniform U(0,1) distribution.
[7]
(ii) (a) Find an expression for the maximum likelihood estimator of the
parameter λ, using a sample y1, y2, …, yn, from the distribution of Y.
(b) Eight observed values of the random variable Y are given below:
State (with reasons) which of the two random variables (X and Y) you
would use to model the lifetime of pensioners for a period of time
longer than one year, basing your answer on the form of the
corresponding hazard functions derived in part (iii)(a).
[5]
[Total 18]
(i) Suppose that the chief scientist knows only that the number, M, of the readings
which are less than 1 is m, with the remaining n − m being greater than 1 and
that she adopts the model as suggested above.
1
(a) Show that the probability that a single reading is less than 1 is .
θ
n
(b) Demonstrate that the maximum likelihood estimate of θ is θˆ = .
m
(c) Demonstrate that the Cramer-Rao lower bound (CRlb) for estimating
θ2 ( θ − 1)
θ is and hence state the large sample distribution of θ̂ .
n
[10]
(ii) Suppose that exactly 45 readings in a random sample of 100 readings are less
than 1.
CT3 S2007—6
13 In a laboratory experiment a response variable (yield, y) is thought to be affected by a
quantitative factor (percentage of catalyst, x). The experiment involved making four
observations of y at each of four values of x, being 12%, 14%, 16% and 18%, and
resulted in the following observed response data.
These data are analysed by two statisticians, A and B, who use an analysis of variance
approach and a linear regression approach, respectively.
sub-totals Σy = 186, 236, 243 and 207 at x = 12, 14, 16 and 18,
respectively, and overall totals Σy = 872 and Σy2 = 48,196.
(a) Apply a one-way analysis of variance to these data and obtain the
resulting F-value for the usual test.
(b) Show that the P-value for the test is substantially less than 0.01, by
referring to tables of percentage points for the F distribution.
(c) The result of part (b) above shows that there is very strong evidence of
an effect on y due to the quantitative factor x. Suggest a suitable
diagram that statistician A could now use to describe the effect of x on
y. Draw this diagram and hence comment on the effect of x on y.
(d) The graph below shows the residuals plotted against the values of x:
(a) Perform a linear regression analysis on these data to show that the
fitted line is given by y = 41.4 + 0.875x.
H0 : β = 0 v H1 : β ≠ 0
(c) The graph below shows the residuals plotted against the values of x:
END OF PAPER
CT3 S2007—8
Faculty of Actuaries Institute of Actuaries
EXAMINATION
September 2007
EXAMINERS’ REPORT
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
M A Stocker
Chairman of the Board of Examiners
December 2007
Comments
The paper was answered quite well overall and there are no particular topics that stand out as
being poorly attempted. Similarly there were no particular misunderstandings widely evident,
and no particular errors were made so repeatedly as to be worthy of comment.
© Faculty of Actuaries
© Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2007 — Examiners’ Report
874525.14 − (5573.6) 2 / 43
∴ s2 = = 3621.02 ∴ s = 60.2
42
Note: We can do away with the step of subtracting r from 1 and use x = (1/r)1/2.
49.5 − 60
= P( Z < = −1.55) = 1 − 0.93943 = 0.061
6.753
0.34 × 0.66
99% CI is 0.34 ± 2.576 i.e. 0.34 ± 0.086 i.e. (0.254, 0.426)
200
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2007 — Examiners’ Report
56.7
5 (i) x= = 7.0875.
8
1⎛ 56.7 2 ⎞
s 2 = ⎜ 403.95 − ⎟ = 0.298 ⇒ s = 0.546 .
7 ⎜⎝ 8 ⎟⎠
s 0.546
x ± t7,0.05 = 7.0875 ± 1.895 = 7.0875 ± 0.3658
n 8
(ii) The value £6500 is not included in the CI above, and therefore we conclude
that the data are not consistent with the expert’s assessment at the 10%
significance level.
r n−2
6 Use the result ~ tn−2 under H0.
1− r2
r
so critical value is solution of 13 = 2.65
1− r2
2.652
Solving gives r = 13 = 0.592
2.652
1+
13
E(S) = λm1 and var(S) = λm2 where λ = E(N) and mr = E(X r)]
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2007 — Examiners’ Report
⎛ 35 − 30 ⎞
(i) (a) P ( X > 35 ) = P ⎜ Z > ⎟ = P ( Z > 1.25 ) = 1 − 0.89435 = 0.10565
⎝ 4 ⎠
⎛ 36 − 30 ⎞
(b) P ( X > 36 ) = P ⎜ Z > ⎟ = P ( Z > 1.5 ) = 1 − 0.93319 = 0.06681
⎝ 4 ⎠
(ii) P(X > 36 | X > 35) = P(X > 36 and X > 35) / P(X > 35)
⎛5⎞ 2 3
(iii) ⎜ ⎟ × 0.1056 × 0.8944 = 0.0798
2
⎝ ⎠
9 (i) If X is the random variable denoting the number of policies giving a claim,
then X ~ binomial(250,0.5).
⎛ 138.5 − 125 ⎞
= P⎜Z > ⎟ = 1 − Φ (1.7076 ) = 0.044 .
⎝ 62.5 ⎠
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2007 — Examiners’ Report
OR work it out
(ii) (
P-value is given by P χ 22 > 9.722 = 0.0077 )
Note: answer = 0.008 is acceptable for the mark
(iii) Comment: With the first table we do not have strong enough evidence to
justify rejecting the hypothesis of no association. In the second table, we have
the same proportions in the columns, but based on more data, and now we do
have strong enough evidence (P-value < 1%) to justify rejecting the
hypothesis of no association.
1
11 (i) (a) Y=X 3 ⇒ X = Y 3 , and range of Y is (0, ∞).
FY ( y ) = P (Y ≤ y ) = P( X ≤ y 3 ) = FX ( y 3 )
⎪⎧1 − exp(−λy 3 ), y ≥ 0
∴ FY ( y ) = ⎨
⎪⎩0, y<0
(using formulae or by integration).
fY ( y ) =
d
dy
( )
FY ( y ) = 3λy 2 exp −λy 3 .
[OR, directly as
dx 3
fY ( y ) = f X ( x) = λe −λy 3 y 2
dy
(
⇒ fY ( y ) = 3λy 2 exp −λy 3 , )
OR, from formulae, identifying the cdf as that of a Weibull distribution
with c = λ, γ = 3. ]
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2007 — Examiners’ Report
1
u = 1 − e−λx ⇒ x = − log(1 − u ) ,
λ
1
then set y = x 3.
1
−λy 3 ⎧ 1 ⎫ 3
[OR, use cdf of Y directly, i.e. u = 1 − e ⇒ y = ⎨− log(1 − u ) ⎬ ]
⎩ λ ⎭
(ii)
{ )} = 3 λ ∏ y
n n ⎛ ⎞
(a) L(λ) = ∏ f ( yi ;λ ) = ∏ 3λyi 2 exp −λyi 3 ( n n
i
2
exp ⎜ −λ ∑ yi 3 ⎟
⎜ ⎟
i =1 i =1 i ⎝ i ⎠
n
′(λ ) = 0 ⇒ λˆ =
∑ yi3
i
n
[Check that ′′(λ ) = − < 0. ]
λ2
f ( x) λe −λx
h( x ) = = =λ
S ( x) 1 − 1 − e −λx ( )
For Y (using pdf and cdf derived above):
h( y ) =
f ( y)
=
3λy 2 exp −λy 3 ( ) = 3λy 2
.
S ( y ) 1 − 1 − exp −λy 3
( ( ))
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2007 — Examiners’ Report
12 (i) Let X be a reading and M be the number of readings which are less than 1
(a) Since X ~ U(0, θ) , P(X < 1) = length of [0,1]/ length of [0, θ] = 1/θ
m n−m
⎛1⎞ ⎛ 1⎞ θ −1 ⎞
(b) L ( θ ) ∝ ⎜ ⎟ ⎜1 − ⎟ ⇒ ( θ ) = −m log θ + ( n − m ) log ⎛⎜ ⎟
⎝θ⎠ ⎝ θ⎠ ⎝ θ ⎠
⇒ ( θ ) = ( n − m ) log ( θ − 1) − n log θ
∂ n−m n
⇒ = − set to zero ⇒ θˆ = n / m
∂θ θ − 1 θ
(1/ θ ) = m / n ⇒ 1/ θˆ = m / n ⇒ θˆ = n / m
(c)
∂
=
n−m n
−
∂2
⇒− 2 =
( n − m) − n
∂θ θ − 1 θ ∂θ ( θ − 1)2 θ2
⎡ ∂2 ⎤ ⎡ n−M ⎤ n n−n/θ n n
∴ E ⎢− 2 ⎥ = E ⎢ ⎥− = − 2= 2
⎣⎢ ∂θ ⎦⎥ ⎢⎣ ( θ − 1) ⎥⎦ θ
2 2
( θ − 1) θ θ ( θ − 1)
2
θ2 ( θ − 1)
∴ CRlb =
n
⎛ θ2 ( θ − 1) ⎞
Large sample distribution of θ̂ is θˆ ∼ N ⎜ θ, ⎟
⎜ n ⎟
⎝ ⎠
(ii) (a) ˆ
n = 100, m = 45, θ = 100 / 45 = 2.222
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2007 — Examiners’ Report
2.222 − 3 ⎞
( ) ⎛
P -value = P θˆ < 2.222 = P ⎜ Z <
⎝ 0.4243 ⎠
⎟ = P ( Z < −1.834 )
We can reject H0 (at levels of testing down to 3.3%) and conclude that
θ < 3.
[OR note that P(Z < −1.834) is less than 0.05, so “reject H0 at 5% level”]
523.5 / 3 174.5
F= = = 14.10
148.5 /12 12.375
(c) Statistician A could plot either the individual y values or the four
means of y against x to see what “shape” the effect might take.
Page 8
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2007 — Examiners’ Report
(d) The implications are simply that there is nothing to invalidate the
assumptions required for the analysis.
2402
(ii) (a) S xx = 3680 − = 80
16
8722
S yy = 48196 − = 672
16
(240)(872)
S xy = 13150 − = 70
16
70
βˆ = = 0.875 as required
80
1
αˆ = (872 − 0.875(240)) = 41.375 as required.
16
1 702
(b) σˆ 2 = (672 − ) = 43.625
14 80
43.625
s.e. (βˆ ) = = 0.7385
80
0.875 − 0
t= = 1.185 on 14 d.f.
0.7385
As P(t14 >1.345) = 0.10 from tables, P-value > 2(0.10), i.e. > 0.20
This implies that there is no evidence against H0, and hence that there
is no linear relationship between x and y.
(c) Residual plot suggests that there may be a curved, rather than linear,
relationship between x and y.
(d) Statistician B could try a quadratic regression (or some other curved
form) of y on x.
END OF EXAMINERS’ REPORT
Page 9
Faculty of Actuaries Institute of Actuaries
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 13 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.
© Faculty of Actuaries
CT3 A2008 © Institute of Actuaries
1 The number of claims which arose during the calendar year 2005 on each of a group
of 80 private motor policies was recorded and resulted in the following frequency
distribution:
Number of claims x 0 1 2 3 4
Number of policies f 64 12 3 0 1
Calculate the sample mean and standard deviation of the number of claims per policy.
[3]
2 Data on a sample of 29 claim amounts give a sample mean of £461.5 and a sample
standard deviation of £618.8.
3 The following sample contains claim amounts (£) on a particular class of insurance
policies:
(i) Determine the mean and the median of the claim amounts. [2]
(ii) State, with reasons, which of the two measures considered above you would
prefer to use to estimate the central point of the claim amounts. [1]
[Total 3]
Find the minimum and maximum possible values of the conditional probability
P( A | B) . [4]
CT3 A2008—2
5 An insurance company covers claims from four different non-life portfolios, denoted
as G1, G2, G3 and G4. The number of policies included in each portfolio is given
below:
Portfolio G1 G2 G3 G4
No. of policies 4,000 7,000 13,000 6,000
It is estimated that the percentages of policies that will result in a claim in the
following year in each of the portfolios are 8%, 5%, 2% and 4% respectively.
Suppose a policy is chosen at random from the group of 30,000 policies comprising
the four portfolios after one year and it is found that a claim did arise on this policy
during the year. Calculate the probability that the selected policy comes from
portfolio G3. [3]
6 Consider two random variables X and Y with joint probability density function (pdf)
4
f ( x, y ) = (1 − xy ) , 0 < x < 1, 0 < y < 1 .
3
2
f ( x) = (2 − x) , 0 < x < 1
3
with a corresponding marginal pdf for Y by symmetry (you are not asked to verify
these marginal densities).
(1 − xy )
f ( y | x) = 2 , 0 < y < 1. [2]
(2 − x)
(b) Verify your answer in part (a) by determining E (Y ) directly from the
marginal pdf of Y. [5]
[Total 7]
1
(i) Use moment generating functions to show that X ~ χ62 . [3]
2
(ii) Hence use tables to find the probability that a claim amount exceeds £20,000.
[2]
[Total 5]
8 A woodcutter has to cut 100 fence posts of a standard length and he has a metal bar of
the required length to act as the standard. The woodcutter decides to vary his
procedure from post to post − he cuts the first post using the metal standard, then uses
this post as his standard for the cut of the next post. He continues in a similar manner,
each time using the most recently cut post as the standard for the next cut.
Each time the woodcutter cuts a post there is an error in the length cut relative to the
standard being employed for that cut − you should assume that the errors are
independent observations of a random variable with mean 0 and standard deviation
3mm.
Calculate, approximately, the probability that the length of the final post differs from
the length of the original metal standard by more than 15mm.
[5]
(i) Calculate the probability of the type I error of this test. [3]
(ii) Calculate the probability of the type II error of this test, if the true probability
that the coin lands “heads” is 0.7. [3]
[Total 6]
10 Pressure readings are taken regularly from a meter. It transpires that, in a random
sample of 100 such readings, 45 are less than 1, 35 are between 1 and 2, and 20 are
between 2 and 3.
Perform a χ2 goodness of fit test of the model that states that the readings are
independent observations of a random variable that is uniformly distributed on (0, 3).
[5]
CT3 A2008—4
11 In an investigation about the duration of insurance policies of a certain type, a sample
of n policies is studied. All n policies have been initiated at the same time, which is
also the time of the start of the investigation. For each policy, the time T (in months)
until the policy expires can be modelled as an exponential random variable with
parameter λ, independently of the times for all other policies.
(i) Suppose that the investigation is terminated as soon as k policies have expired,
where k is a known (predetermined) constant. The observed policy expiry
times are denoted by t1, t2, …, tk with 0 < k ≤ n and t1< t2 < … < tk.
(a) Show that the probability that any randomly selected policy is still in
force at the time of the termination of the investigation is e −λtk .
(b) Show that the likelihood function of the parameter λ, using information
from all n policies, is given by
k
−λ ∑ ti
L (λ ) = λ k e i =1 e − ( n − k ) λtk .
(ii) Suppose instead that the investigation is terminated after a fixed length of time
t0. The number of policies that have expired by time t0 is considered to be a
random variable, denoted by K.
(a) Explain clearly why the distribution of K is binomial and determine its
parameters.
(i) An analysis of variance is conducted on these results and gives the following
ANOVA table:
(a) Test the hypothesis that there are no school effects against a general
alternative.
(b) Calculate a 95% confidence interval for the underlying mean score for
club members in School 1, using the information available from all
three schools. [7]
CT3 A2008—6
(ii) The members of the computer games club of a nearby fourth school hear about
the competition and ask to be included in the overall comparison. Scores for a
random sample of five of the club members at this school (School 4) are
obtained and are:
The scores obtained by all twenty students are shown in the display below:
(a) Carry out an analysis of variance on the results for all four schools
together − you should construct the ANOVA table and test the
hypothesis that there are no school effects against a general alternative.
x: 8.5 9.8 10.8 11.5 11.2 9.6 10.1 13.5 14.2 11.8 8.7 6.8
y: 3 12 10 14 8 7 9 13 17 10 5 5
(i) Construct a scatterplot of blood flow against auricular pressure and comment
briefly on any relationship between them. [3]
(ii) Calculate the equation of the least-squares fitted regression line of blood flow
on auricular pressure. [4]
(iii) (a) Use a suitable pivotal quantity with a t distribution to show how to
derive the usual 95% confidence interval for the slope coefficient of
the underlying regression line, and calculate the interval.
(iv) (a) Use a suitable pivotal quantity with a χ2 distribution to derive a 95%
confidence interval for the underlying error variance σ2, and calculate
the interval.
(b) Hence calculate a 95% confidence interval for the error standard
deviation σ. [5]
[Total 17]
END OF PAPER
CT3 A2008—8
Faculty of Actuaries Institute of Actuaries
EXAMINERS’ REPORT
April 2008
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
M A Stocker
Chairman of the Board of Examiners
June 2008
© Faculty of Actuaries
© Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2008 — Examiners’ Report
x = 22 / 80 = 0.275
1 ⎛ 222 ⎞ 33.95
s2 = ⎜⎜ 40 − ⎟= = 0.42975 ⇒ s = 0.656
79 ⎝ 80 ⎟⎠ 79
2 Σx = nx = 29(461.5) = 13383.5
9726
∴x = = £347.4
28
2 1 97262
s = [3520756 − ] = 5272.6 ∴ s = £72.6
27 28
23778
3 (i) x= = 1829.08.
13
(ii) The median should be preferred, as it is not sensitive to the extreme observed
claim of £4320.
P ( A ∩ B)
4 P ( A | B) =
P ( B)
0.1
Maximum value of P(B) is 0.8 in which case P ( A | B ) = = 0.125
0.8
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2008 — Examiners’ Report
P(C | B3 ) P( B3 ) P(C | B3 ) P( B3 )
P ( B3 | C ) = = ,
P(C ) ∑ P(C | Bi ) P( Bi )
i
which gives
13
0.02 ×
30 0.26 / 30 0.26
P ( B3 | C ) = = = = 0.222 .
4 7 13 6 1.17 / 30 1.17
0.08 × + 0.05 × + 0.02 × + 0.04 ×
30 30 30 30
f ( x, y )
6 (i) f ( y | x) =
f ( x)
4
(1 − xy )
3 (1 − xy )
= =2 , 0 < y <1
2 (2 − x)
(2 − x)
3
2 1
(2 − x) ∫ 0
(ii) (a) E (Y | X = x) = y (1 − xy )dy
2 y2 y3 1 2 1 x (3 − 2 x)
= [ − x ]0 = ( − )=
(2 − x) 2 3 (2 − x) 2 3 3(2 − x)
1 (3 − 2 x )2
E (Y ) = ∫ (2 − x)dx
0 3(2 − x ) 3
2 1 2 4
9 ∫0
2 1
= (3 − 2 x ) dx = [3 x − x ]0 =
9 9
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2008 — Examiners’ Report
2 1 2 2 y3 1 2 2 4
3 ∫0
(b) E (Y ) = y (2 − y ) dy = [ y − ]0 = ⋅ =
3 3 3 3 9
1
Let Y = X.
2
∴ M Y (t ) = E (etY ) = E (etX / 2 ) = M X (t / 2) = (1 − 2t ) −6 / 2
= 1 – 0.8753 = 0.1247
8 Let L be the length of the metal bar and Zi be the error that arises at the ith cut.
P(|E| <15) ≈ P(|Z| < 15/30) = P(|Z| < 0.5) = 2 × 0.1915 = 0.383
which gives
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2008 — Examiners’ Report
( )
⇒ β = 1 − 0.34 + 0.7 4 = 0.7518.
Reject model (at the 1% level of testing) as not providing a good fit to the data.
k n
L(λ) = ∏ f (ti ) ∏ P(T > tk )
i =1 j = k +1
k
−λ ∑ ti
( ) ∏ (e ) = λ e
k n
= ∏ λe−λti −λtk k i =1 e − ( n − k ) λ tk
i =1 j = k +1
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2008 — Examiners’ Report
k
l (λ ) = log L(λ ) = k log(λ ) − λ ∑ ti − (n − k )λtk
i =1
k k
l ′(λ ) = − ∑ ti − (n − k )tk
λ i =1
k
l ′(λ ) = 0 ⇒ λˆ = k
.
∑ ti + (n − k )tk
i =1
k
[And l ′′(λ ) = − <0]
λ2
k
n = 20, k = 5, tk = 21.54, ∑ ti = 54.82 .
i =1
k 5
λˆ = = = 0.0132 .
k 54.82 + 15 × 21.54
∑ ti + (n − k )tk
i =1
(ii) (a) We have n policies with independent durations, and each will have
expired by the time of termination with probability
p = P(T ≤ t0 ) = 1 − e−λt0 ,
(
l (λ ) = log L(λ ) = k log 1 − e−λt0 − (n − k )λt0 )
kt0 e−λt0
l ′(λ ) = − (n − k )t0
1 − e−λt0
n−k 1 ⎛ k⎞
l ′(λ ) = 0 ⇒ e−λt0 = ⇒ λˆ = − log ⎜1 − ⎟
n t0 ⎝ n⎠
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2008 — Examiners’ Report
1 ⎛ k⎞ 1 ⎛ 5 ⎞
λˆ = − log ⎜ 1 − ⎟ = − log ⎜1 − ⎟ = 0.0120 .
t0 ⎝ n⎠ 24 ⎝ 20 ⎠
From Yellow Tables pages 172/3, P-value of the data is between 0.05
and 0.025.
t12(0.025) = 2.179
(ii) (a) y1• = 598, y2• = 485, y3• = 629, y4• = 566
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2008 — Examiners’ Report
From Yellow Tables pages 172/3, P-value of the data is just more than
0.1 (>10%)
(b) With only three schools involved, the results from one of them (School
2) are sufficiently different from those of the other two to allow us to
detect a difference among underlying means. However, the results for
the fourth school range across the results for the original three schools
− with all four schools in the comparison, the “between schools” sum
of squares is no longer so high relative to the residual and we fail to
detect differences.
0.5
⎧ ⎛ 1 1 ⎞⎫
95% CI is (119.6 − 97 ) ± 2.120 ⎨314 ⎜ + ⎟ ⎬
⎩ ⎝ 5 5 ⎠⎭
Page 8
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2008 — Examiners’ Report
(ii) n = 12
126.52
S xx = 1381.85 − = 48.3292
12
1132
S yy = 1251 − = 186.9167
12
(126.5)(113)
S xy = 1272.2 − = 80.9917
12
S xy 80.9917
βˆ = = = 1.676
S xx 48.3292
1
αˆ = y − βˆ x = (113 − 1.6758*126.5) = −8.249
12
2
βˆ − β 1 S xy
(iii) (a) ~ tn −2 where σˆ 2 = ( S yy − )
σˆ 2 n−2 S xx
S xx
βˆ − β
P[−tn −2 (2.5%) < < tn−2 (2.5%)] = 0.95
σˆ 2
S xx
2
ˆβ ± t (2.5%) σˆ
n−2
S xx
1 (80.9917) 2
Here: σˆ 2 = (186.9167 − ) = 5.1188
10 48.3292
(b) As 1.5 lies comfortably inside this confidence interval, then there is no
evidence at all against the hypothesis that β = 1.5.
Page 9
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2008 — Examiners’ Report
(n − 2)σˆ 2
(iv) (a) 2
~ χ 2n−2
σ
(n − 2)σˆ 2
P[χ n2− 2 (97.5%) < 2
< χ 2n− 2 (2.5%)] = 0.95
σ
(n − 2)σˆ 2 2 (n − 2)σˆ 2
<σ <
χ n2 − 2 (2.5%) χ n2 −2 (97.5%)
10(5.1188) 10(5.1188)
Here 95% CI is < σ2 <
20.48 3.247
⇒ (2.50,15.76)
Page 10
Faculty of Actuaries Institute of Actuaries
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 12 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.
© Faculty of Actuaries
CT3 S2008 © Institute of Actuaries
1 The mean of a sample of 30 claim amounts arising from a certain kind of insurance
policy is £5,200. Six of these claim amounts have mean £8,000 while ten others have
mean £3,100.
Calculate the mean of the remaining claim amounts in this sample. [3]
2 Five years ago a financial institution issued a specialised type of investment bond and
investors had the option to cash in after 1, 2, 3, 4 or 5 years. The following table
gives a frequency distribution showing the numbers of those investors who cashed in
at each stage.
130 151 97 64 98
Calculate the sample mean and standard deviation of the duration of these bonds
before being cashed in. [4]
3 (i) Let Y be the sum of two independent random variables X1 and X2, that is,
Y = X1 + X 2 .
Show that the moment generating function (mgf) of Y is the product of the
mgfs of X1 and X2. [2]
Find expressions for the unconditional moments E[X] and E[X 2] using appropriate
conditional moments. [4]
CT3 S2007—2
6 Suppose that the time T, measured in days, until the next claim arises under a
portfolio of non-life insurance policies, follows an exponential distribution with
mean 2.
(i) Find the probability that no claim is made in the next one day period. [2]
(ii) The median of a random variable is defined as the value for which the
cumulative distribution function of the variable is equal to 0.5.
Find the median time until the next claim arises. [2]
(iii) Now let T1, T2, …, T30 be the times (in days) until the next claim arises under
each one of 30 similar portfolios of non-life insurance policies, and assume
that each Ti, i = 1,…,30, follows an exponential distribution with mean 2,
independently of all others.
Calculate, approximately, the probability that the total of all 30 times which
elapse until a claim arises on each of the portfolios exceeds 45 days. [4]
[Total 8]
7 Let N be the number of claims arising on a group of policies in a period of one week
and suppose that N follows a Poisson distribution with mean 60.
Let X1, X2, . . , XN be the corresponding claim amounts and suppose that,
independently of N, these are independent and identically distributed with mean £500
and standard deviation £400.
N
Let S = ∑ X i be the total claim amount for the period of one week.
i =1
(ii) Explain why the distribution of S can be taken as approximately normal, and
hence calculate, approximately, the probability that S is greater than £40,000.
[3]
[Total 5]
0.9236 , 0.2578
0.3287 , 0.9142
9 A random sample of four insurance policies of a certain type was examined for each
of three insurance companies and the sums insured were recorded. An analysis of
variance was then conducted to test the hypothesis that there are no differences in the
means of the sums insured under such policies by the three companies.
The total sum of squares was found to be SST = 420.05 and the between-companies
sum of squares was found to be SSB = 337.32.
(i) Perform the analysis of variance to test the above hypothesis and state your
conclusion. [4]
(ii) State clearly any assumptions that you made in performing the analysis in (i).
[2]
(iii) The plot of the residuals of this analysis of variance against the associated
fitted values, is given below.
4
2
Residuals
0
-2
-4
18 20 22 24 26 28 30 32
Fitted
Comment briefly on the validity of the test performed in (i), basing your
answer on the above plot. [2]
[Total 8]
CT3 S2007—4
10 When a new claim comes into an office it is screened at a first stage and has a
probability θ of being cleared for progress, otherwise it is rejected. If it clears the first
stage, it is then independently screened at a second stage and has the same probability
θ of being cleared for progress, otherwise it is rejected.
(i) Explain clearly why the probability of a claim being rejected at the first stage
is 1 - θ, of being rejected at the second stage is θ (1 - θ) and of progressing
after the two stages is θ2. [3]
(ii) For a sample of n independent claims which came into the office x1 were
rejected at the first stage, x2 were rejected at the second stage and x3
progressed after the two stages (x1 + x2 + x3 = n).
(a) Write down the likelihood L(θ) for this sample and hence show that the
derivative of the log-likelihood is given by
∂ x + 2 x3 x1 + x2
log L(θ) = 2 − .
∂θ θ 1− θ
x2 + 2 x3
θˆ = .
x1 + 2 x2 + 2 x3
[7]
∂ 2
(iii) (a) Determine the second derivative log L(θ) of the log-likelihood in
∂θ2
part (ii) above and hence show that the Cramer-Rao lower bound
θ(1 − θ)
(CRlb) is given by .
n(1 + θ)
(b) Use the asymptotic distribution for the MLE θ̂ with the CRlb
evaluated at θ̂ to obtain an approximate large-sample 95% confidence
interval for θ expressing it simply in terms of θ̂ and n.
[7]
(iv) For a sample of 1,000 independent claims, 110 were rejected at the first stage,
96 were rejected at the second stage and 794 progressed after the two stages.
Male Female
4 8 2 6 9 6 4 10 2 7 5 1 9 1 3
6 6 8 7 3 5 6 1 8 6 4 1 5 4 4
10 7 5 7 7 6 9 2 3 5 4 6 5 1 8
1 7 2 8 11 5 6 2 7 2 4 4 11 6 8
1 8 1 3 9 3 1 3 3 6 5 9 6 2 3
The male observations are assumed to be normally distributed with mean μ1 and
standard deviation σ1 , and independently the female observations are assumed to be
normally distributed with mean μ2 and standard deviation σ 2 .
(i) Suppose that it is known that σ1 = 3.0 days and σ2 = 2.5 days.
(a) Construct a 95% confidence interval for the difference between the
mean length of stay for males and the mean length of stay for females,
that is for μ1 − μ2.
(b) Show that the variances in the male and female samples are not
significantly different at the 5% level, and comment briefly with
reference to the validity of the test conducted in (ii)(a).
(c) Suppose you are not prepared to assume more than you feel is
absolutely necessary – in particular you do not want to assume that
σ1 and σ2 are equal, nor that the observations necessarily come from
normal populations.
CT3 S2007—6
12 Consider a situation in which the data consist of two responses at each of five values
of an explanatory variable (x = 1, 2, 3, 4, 5), so we have a data set with ten responses
(y), as in the following table:
x 1 1 2 2 3 3 4 4 5 5
y 12 19 18 35 19 44 32 53 44 65
For these data Σx = 30, Σy = 341, Σx2 = 110, Σy2 = 14,345 , Σxy = 1,211
(i) You are asked to carry out a linear regression analysis using these data.
(a) Draw a plot of the data to show the relationship between the response
and explanatory values.
(b) Calculate the total, regression, and residual sums of squares for a least-
squares linear regression analysis of y on x, and hence calculate the
value of R2, the coefficient of determination.
(d) Calculate a 95% confidence interval for the slope of the underlying
regression line.
[12]
(ii) A colleague suggests that it will be simpler and will produce the same results
if we use the following reduced data, in which the two responses at each x
value are replaced by their mean:
x 1 2 3 4 5
y 15.5 26.5 31.5 42.5 54.5
The details of the regression analysis for these data are given in the box below.
Discuss the similarities and the differences between the two approaches and their
results, in particular addressing the claim by the colleague that the two analyses will
produce “the same results”.
[6]
[Total 18]
END OF PAPER
CT3 S2008—7
Faculty of Actuaries Institute of Actuaries
EXAMINERS’ REPORT
September 2008
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
R D Muckart
Chairman of the Board of Examiners
November 2008
Comments
The paper was answered well overall and there are no particular topics that stand out as being
poorly attempted. Similarly there were no particular misunderstandings widely evident, and
no particular errors were made so repeatedly as to be worthy of comment.
© Faculty of Actuaries
© Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2008 — Examiners’ Report
1 n = 30, x = 5200
n1 = 6, x1 = 8000
n2 = 10, x2 = 3100
n3 = 14
x=
∑ x = n1x1 + n2 x2 + n3 x3
n n1 + n2 + n3
1469
mean = = 2.72 years
540
1 14692
variance = (5081 − ) = 2.0126 ∴ s.d. = 1.42 years
539 540
t t
(ii) M X i (t ) = (1 − ) −αi ∴ M Y (t ) = (1 − ) −(α1 +α 2 )
λ λ
4 t14(0.005) = 2.977
24.86
99% CI is 94.2 ± 2.977 i.e. 94.2 ± 3.83 i.e. (90.37,98.03)
15
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September2008 — Examiners’ Report
E ( X ) = EY { E X ( X Y )} = E (Y ) =
a
5 .
b
E ( X 2 ) = var( X ) + E 2 ( X )
with
giving
a a a2
E( X ) = + 2 + 2 .
2
b b b
{
[OR E ( X 2 ) = EY E X ( X 2 Y ) }
= EY {varX }
( X Y ) + E X2 ( X Y ) = E (Y ) + E (Y 2 )
= E (Y ) + var(Y ) + E 2 (Y )
a a a2
= + + .]
b b2 b2
M M
(ii) The median, M, is such that ∫ f (t )dt = 0.5 ⇒ ∫ 0.5e −0.5t dt = 0.5
0 0
which gives
30
(iii) From CLT, Y = ∑ Ti ~ N (30 × 2, 30 × 4), i.e. N (60,120) , approximately.
i =1
Then,
⎛ 45 − 60 ⎞
P (Y > 45) = P ⎜ Z > ⎟ = P( Z > −1.3693) = P( Z < 1.3693) = 0.915.
⎝ 120 ⎠
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2008 — Examiners’ Report
V ( S ) = E ( N )V ( X ) + V ( N )[ E ( X )]2
(ii) As S is the sum of a large number of i.i.d. variables, then the central limit
theorem gives an approximate normal distribution for S.
40000 − 30000
P ( S > 40000) = P ( Z > = 2.016)
4960
= 1 − 0.9781 = 0.0219
Note: We can do away with the step of subtracting r from 1 and use.
The degrees of freedom are 3 – 1 = 2 for the treatment (company) SS, and
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September2008 — Examiners’ Report
337.32 2
These give F = = 18.348.
82.73 9
From tables, F0.01,2,9 = 8.022, and therefore we have strong evidence against
the hypothesis that the means of the insured sums are equal for the 3
companies.
(ii) To perform the ANOVA we assume that the data follow normal distributions
and that their variance is constant.
(iii) The variance of the residuals seems to depend on the company from which the
data come. This violates the assumption of constant variance in the response
variable, and therefore the analysis may not be valid.
= θ x2 + 2 x3 (1 − θ) x1 + x2
∂ x + 2 x3 x1 + x2
∴ log L(θ) = 2 −
∂θ θ 1− θ
∴θ( x1 + x2 ) = (1 − θ)( x2 + 2 x3 )
∴θ( x1 + 2 x2 + 2 x3 ) = x2 + 2 x3
x2 + 2 x3
∴θˆ =
x1 + 2 x2 + 2 x3
∂2 x2 + 2 x3 x1 + x2
(iii) (a) log L(θ) = − −
∂θ 2
θ2 (1 − θ) 2
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2008 — Examiners’ Report
n n 1 1 n(1 + θ)
= − (1 + θ) − (1 + θ) = − n(1 + θ)( + )=−
θ (1 − θ) θ 1 − θ) θ(1 − θ)
1 θ(1 − θ)
CRlb = =
∂2 n(1 + θ)
− E[ log L(θ)]
∂θ2
θˆ (1 − θˆ ) θˆ (1 − θˆ )
using CRlb = , then θˆ ≈ N (θ, )
n(1 + θˆ ) n(1 + θˆ )
θˆ (1 − θˆ )
95% CI is θˆ ± 1.96
n(1 + θˆ )
96 + 2(794) 1684
(iv) θˆ = = = 0.8910
110 + 2(96) + 2(794) 1890
0.8910(1 − 0.8910)
CRlb ≈ = 0.0000514 ∴ CRlb = 0.00717
1000(1 + 0.8910)
95% CI:
σ12 σ22
x1 − x2 ± z0.025 +
n1 n2
32 2.52
= 5.375 – 4.8 ± 1.96 +
40 35
= 0.575 ± (1.96)(0.6353)
(b) As this CI includes the value 0 we would not eliminate the possibility
that the males and females have the same expected length of stay.
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September2008 — Examiners’ Report
(ii) (a)
x1 − x2 5.375 − 4.8
t= = = 0.909
⎛1 1 ⎞ ⎛ 1 1 ⎞
s 2p ⎜ + ⎟ 7.46541⎜ + ⎟
⎝ n1 n2 ⎠ ⎝ 40 35 ⎠
[OR just quote the N(0,1) value 1.96 in place of the t73 value.]
s12 8.34295
(b) = = 1.29
s22 6.45882
x1 − x2
(c) z=
s12 s22
+
n1 n2
5.375 − 4.8
=
8.34295 6.45882
+
40 35
= 0.917
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2008 — Examiners’ Report
Compare with N(0,1), e.g. 1.96 for 5% level test. Therefore we reach
exactly the same conclusion (as in (ii)(a) but without making the
assumptions of equal variances and normal distributions – we have
large samples and can rely on CLT).
12 (i) (a)
1/ 2
(d) () ⎛ 949.7 / 8 ⎞
s.e. bˆ = ⎜
⎝ 20 ⎠
⎟ = 2.4363
t8(0.025) = 2.306
Page 8
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September2008 — Examiners’ Report
the estimate of the slope has a much lower standard error (2.436 drops to 0.6733)
the SSTOT drops hugely (from 2716.9 on 9df to 897.2 on 4df)
the residual error (SSRES) drops hugely [from 949.7 on 8df (error variance
estimate 118.7 ) to 13.60 on 3 df (error variance estimate 4.53)]
BUT we lose all information on the variation of the response for a given value of
the explanatory variable
Page 9
Faculty of Actuaries Institute of Actuaries
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 13 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.
© Faculty of Actuaries
CT3 A2009 © Institute of Actuaries
1 A random sample of 12 claim amounts (in units of £1,000) on a general insurance
portfolio is given by:
14.9 12.4 19.4 3.1 17.6 21.5 15.3 20.1 18.8 11.4 46.2 16.2
Calculate the sample mean, median, and standard deviation of the sample (of size 10)
which remains after we remove the claim amounts 3.1 and 46.2 from the original
sample (you should show intermediate working and/or give justifications for your
answers). [6]
2 Consider three events A, B, and C for which A and C are independent, and B and C are
mutually exclusive. You are given the probabilities P(A) = 0.3, P(B) = 0.5, P(C) = 0.2
and P(A∩B) = 0.1.
4 Let the random variable Y denote the size (in units of £1,000) of the loss per claim
sustained in a particular line of insurance. Suppose that Y follows a chi-square
distribution with 2 degrees of freedom. Two such claims are randomly chosen and
their corresponding losses are assumed to be independent of each other.
(i) Determine the mean and the variance of the total loss from the two claims. [2]
(ii) Find the value of k such that there is a probability of 0.95 that the total loss
from the two claims exceeds k. [2]
[Total 4]
Calculate an approximate value for the probability that at least 240 of these new
employees will still be employed by the company after one year. [3]
CT3 A2009—2
6 The variables X1, X2, …, X40 give the size (in units of £100) of each of 40 claims in a
random sample of claims arising from damage to cars by vandals. The size of each
claim is assumed to follow a gamma distribution with parameters α = 4 and λ = 0.5
1 40
and each is independent of all others. Let X = ∑ X i be the random variable
40 i =1
giving the mean size of such a sample.
(i) State the approximate sampling distribution of X and determine its parameters.
[2]
It is assumed that, independently for each week, the number of accidents follows a
Poisson distribution with mean λ.
(iii) Comment on your answers in parts (i) and (ii) above. [1]
[Total 7]
Calculate a 95% one-sided upper confidence limit (that is, the upper limit k of a
confidence interval of the form (0,k)) for the standard deviation of the claim amounts
in the population. [5]
(i) Calculate the observed F statistic, specify an interval in which the resulting
P-value lies, and state your conclusion clearly. [3]
(a) Calculate the least significant difference between pairs of means using
a 5% level.
(b) List the means in order, illustrate the non-significant pairs using
suitable underlining, and comment briefly.
[3]
[Total 6]
10 For a group of policies the probability distribution of the total number of claims, N,
arising during a period of one year is given by
Each claim amount, X (in units of £1,000), follows a gamma distribution with
parameters α = 2 and λ = 0.1 independently of each other claim amount and of the
number of claims.
Calculate the expected value and the standard deviation of the total of the claim
amounts for a period of one year. [5]
CT3 A2009—4
11 The number of claims, X, which arise in a year on each policy of a particular class is
to be modelled as a Poisson random variable with mean λ. Let X = (X1, X2, …, Xn) be
1 n
a random sample from the distribution of X, and let X = ∑ Xi .
n i =1
n
(i) (a) Use moment generating functions to show that ∑ X i has a Poisson
i =1
distribution with mean nλ.
(b) State, with a brief reason, whether or not the variable 2X1 + 5 has a
Poisson distribution.
(c) State, with a brief reason, whether or not X has a Poisson distribution
in the case that n = 2.
He decides to use a random sample of size n = 100 and the best (most powerful)
available test. You may assume that this test rejects H0 for x > k , for some
constant k.
(ii) (a) Show that the value of k for the test with level of significance 0.01 is
k = 1.2326.
(b) Calculate the power of the test in part (ii)(a) in the case λ = 1.2 and
then in the case λ = 1.5.
(c) Comment briefly on the values of the power of the test obtained in part
(ii)(b).
[9]
[Total 17]
class: A B C D
frequency: 1071 62 68 299
A genetic model specifies that the probability that an individual plant belongs to each
class is given by:
class: A B C D
probability: 1 1 1 1
(2 + θ) (1 − θ) (1 − θ) θ
4 4 4 4
(i) (a) Write down the likelihood for these data and determine the log-
likelihood.
(ii) (a) Determine the second derivative of the log-likelihood and use this,
evaluated at θ̂ = 0.825, to obtain an approximation for the Cramer-Rao
lower bound for this situation.
(iii) An extension of the genetic model suggests that the value of θ should be equal
to 0.775.
(a) Carry out an appropriate χ2 test to investigate the extent to which the
current data support the extended model with this value of θ (you
should calculate and comment on the P-value).
CT3 A2009—6
13 The following table gives the scores (out of 100) that 10 students obtained on a
midterm test (x) and the final examination (y) in a course in statistics.
Midterm x 65 62 50 82 80 68 88 67 90 92
Final y 44 49 54 59 66 67 71 81 89 98
For these data you are given: Sxx = 1,760.4, Syy = 2,737.6, Sxy = 1,529.8
(i) (a) Draw a scatterplot of the data and comment briefly on the relationship
between the score in the final examination and that in the midterm test.
(b) The equation of the line of best fit is given by y = 3.146 + 0.869x.
Perform a suitable test involving the slope parameter β, to test the null
hypothesis H0: β = 0 against H1: β > 0.
(c) Calculate a 95% confidence interval for the mean final examination
score for a midterm score of 75.
The lecturer of this course decides to assess the linear relationship between the score
in the final examination and that in the midterm test, by using the sample correlation
coefficient r.
The hypothesis H0: ρ = 0 (where ρ denotes the population correlation coefficient) can
be tested against H1: ρ > 0, by using the result that under H0 the sampling distribution
r n−2
of the statistic is the tn-2 distribution (where n is the size of the sample).
1− r2
(ii) (a) Show algebraically, that is without referring to the specific data given
here, that in general the above statistic and the statistic involving β that
you used in (i)(b) produce equivalent tests.
(b) Calculate the value of r for the given data and hence verify numerically
the result of part (ii)(a) above.
[6]
[Total 19]
END OF PAPER
CT3 A2009—7
Faculty of Actuaries Institute of Actuaries
EXAMINERS’ REPORT
April 2009
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
R D Muckart
Chairman of the Board of Examiners
June 2009
Comments
The paper was answered quite well overall. Some questions were answered less well (or by
noticeably fewer candidates) than others – they were:
Question 7(i) – confidence intervals based on small samples
Question 9(ii) – differences between pairs of treatment means in an ANOVA context
Question 11(i) – deciding whether or not certain variables derived from Poisson variables are
themselves Poisson variables
Question 12 – writing down the correct likelihood function, in which the stated probabilities
are raised to powers given by the observed frequencies of occurrence (not multiplied by the
frequencies)
There were no other misunderstandings widely evident, and no particular errors were made so
repeatedly as to be worthy of comment.
© Faculty of Actuaries
© Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2009 — Examiners’ Report
1/ 2
⎧⎪ 1 ⎛ 167.62 ⎞ ⎫⎪
so revised standard deviation = ⎨ ⎜ 2908.08 − ⎟⎬ = 3.31837 i.e. £3,318.37
⎜ 10 ⎟⎠ ⎪⎭
⎪⎩ 9 ⎝
1 1 1
⎡ x3 ⎤ ⎛ 1⎞
3 (i) ∫ f ( x)dx = 1 ⇒ ∫ k (1 − x 2 )dx = 1 ⇒ k ⎢ x − ⎥ = 1 ⇒ k ⎜1 − ⎟ = 1 ⇒ k = 1.5
⎣⎢ 3 ⎥⎦ ⎝ 3⎠
0 0 0
1
(ii) P(X > 0.25) = ∫ 0.25 f ( x)dx
1
1 ⎡ x3 ⎤
= ∫ 1.5(1 − x )dx = 1.5 ⎢ x − ⎥
2
= 1.5 × 0.422 = 0.633.
0.25 ⎢⎣ 3 ⎥⎦
0.25
So, for total loss, mean = £4,000 and variance = 8 ×106 (£2).
(OR from Y1 + Y2 ~ χ 24 )
(
such that P χ 4 > k = 0.95.
2
)
( )
From tables of the χ 24 distribution P χ 24 > 0.7107 = 0.95.
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2009 — Examiners’ Report
239.5 − 229.6
= P( Z > ) = P ( Z > 1.54) = 1 − 0.93822 = 0.062
6.43
∑ Xi ⎛
40
Var[ X i ] ⎞
Using the CLT: X = i =1 ≈ N E[ X ], ⎜ i , i.e. N(8, 0.4)
⎟
40 ⎝ 40 ⎠
approximately.
[Note: The exact distribution of X is Gamma(160,20)]
7 (i) For a single observation x from Poisson(λ) a 95% confidence interval for λ is
(λ1,λ2) where
∞ x
∑ p(r; λ1) = 0.025 and ∑ p(r; λ 2 ) = 0.025
r=x r =0
So for x = 2
∞ 1
λ1 is s.t. ∑ p(r; λ1) = 0.025 i.e. ∑ p(r; λ1) = 0.975
r =2 r =0
2
λ2 is s.t. ∑ p(r; λ 2 ) = 0.025
r =0
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2009 — Examiners’ Report
X −λ ΣX − nλ
≈ N (0,1) where λˆ = X [OR: could use ≈ N (0,1) ]
ˆλ ˆ
nλ
n
X
giving an approximate 95% confidence interval as X ± 1.96
n
2.4
95% CI is 2.4 ± 1.96 ⇒ 2.4 ± 0.55 ⇒ (1.85, 2.95)
30
24 S 2 ⎛ 24S 2 ⎞
~ χ 224 ⇒ P ⎜ 2 > 13.85 ⎟ = 0.95
σ2 ⎜ σ ⎟
⎝ ⎠
⎛ 2 24S 2 ⎞ 2 2
⇒ P⎜σ < ⎟⎟ = 0.95 ⇒ k = 24 × 2.105 / 13.85 = 7.678
⎜ 13.85 ⎠
⎝
2239
9 (i) F= = 18.66 on 3,28 d.f.
120
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2009 — Examiners’ Report
1 1 1 1
(ii) (a) LSD = t28 (2.5%) σˆ 2 ( + ) = 2.048 120( + ) = 11.2
8 8 8 8
(b) means in order y3. < y2. < y1. < y4.
underlined thus:
2 2
E[X ] = = 20, Var [ X ] = 2 = 200
0.1 0.1
∴ sd ( S ) = 20 , i.e. £20,000.
n
11 (i) (a) Let S = ∑ X i
i =1
{(
M X ( t ) = exp λ et − 1 )}
{( )} { ( )}
n
⇒ M S ( t ) = {M X ( t )} = ⎡ exp λ et − 1 ⎤ = exp nλ et − 1
n
⎣⎢ ⎥⎦
⇒ S ~ Poisson(nλ)
(b) No
[Note: another obvious reason is that 2X1 + 5 can only takes values 5,
7, 9, … , not 0, 1, 2, 3,… ]
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2009 — Examiners’ Report
(c) No
[Note: another obvious reason is that X can take values 0.5, 1.5, 2.5,
… , which a Poisson variable cannot.]
⎛ λ⎞
(d) X ≈ N ⎜ λ, ⎟
⎝ n⎠
⎛ 1 ⎞
(ii) (a) Under H0 , X ~ N ⎜1 , ⎟ approximately
⎝ 100 ⎠
k −1
k is such that P ( X > k | H 0 ) = 0.01 so = 2.3263
0.1
⇒ k = 1.2326
(c) Power of test increases as the value of λ increases further away from
λ = 1.
1 1 1 1
12 (i) (a) L(θ) = [ (2 + θ)]1071[ (1 − θ)]62 [ (1 − θ)]68[ θ]299 (× constant)
4 4 4 4
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2009 — Examiners’ Report
d2
at θˆ = 0.825 , log L(θ) = −134.20 − 4244.90 − 439.30 = −4818.4
d θ2
1 1
CRlb = ≈ = 0.0002075
⎡ d2 ⎤ 4818.4
− E ⎢ 2 log L(θ) ⎥
⎢⎣ d θ ⎥⎦
( o − e) 2
∴χ 2 = ∑ = 0.887 + 5.934 + 3.178 + 0.241 = 10.24 on 3 df
e
These data do not support the model with the value θ = 0.775 in that
the probability of observing these data when θ = 0.775 is only 0.017.
(b) This is consistent with the fact that θ = 0.775 is well outside the
approximate 95% CI.
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2009 — Examiners’ Report
100
90
80
Final exam score
70
60
50
40
30
50 60 70 80 90
Midterm score
[Following comment also valid: the relationship looks linear but with
substantial scatter.]
1 ⎛ ⎞ 1⎛
2
2 S xy (1529.8)2 ⎞
(b) σˆ = ⎜ S yy − ⎟ = ⎜ 2737.6 − ⎟ = 176.0241
n−2⎜ S xx ⎟ 8 ⎜⎝ 1760.4 ⎟⎠
⎝ ⎠
σˆ 2 176.0241
s.e. (βˆ ) = = = 0.3162
S xx 1760.4
βˆ − 0 0.869
= = 2.748 ,
s.e.(βˆ ) 0.3162
and under the assumption that the errors of the regression are
i.i.d. N (0, σ2 ) random variables, it has a t distribution
with n - 2 = 8 df.
Page 8
Subject CT3 (Probability and Mathematical Statistics Core Technical) — April 2009 — Examiners’ Report
1 ( xnew − x ) 2
s.e.(yˆ new ) = σˆ +
n S xx
1 (75 − 74.4) 2
= 13.26741 + = 13.26741× 0.31655
10 1760.4
= 4.1998
or (58.636, 78.006)
(d) The CI for the individual predicted score will be wider than the CI for
the mean score in (i)(c), because the variance for the individual
predicted value is larger.
(ii) (a) Both statistics follow a tn-2 distribution under the null hypothesis.
In addition
S xy S xy
(n − 2) S xx
βˆ − 0 S xx S xx r n−2
= = =
σˆ 2 1 ⎛ 2
S xy ⎞ 2
S xy 1− r2
⎜ S yy − ⎟ S yy 1 −
S xx (n − 2) S xx ⎜ S xx ⎟ S xx S yy
⎝ ⎠
S xy 1529.8
(b) r= = = 0.6969.
S xx S yy 1760.4 × 2737.6
r n−2 0.6969 × 8
Then = = 2.748 , same as in (i)(b).
2 2
1− r 1 − 0.6969
Page 9
Faculty of Actuaries Institute of Actuaries
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Attempt all 12 questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.
© Faculty of Actuaries
CT3 S2009 © Institute of Actuaries
1 In a sample of 100 households in a specific city, the following distribution of number
of people per household was observed:
Number of people x 1 2 3 4 5 6 7
Number of households fx 7 f2 20 f4 18 10 5
The mean number of people per household was found to be 4.0. However, the
frequencies for two and four members per household (f2 and f4 respectively) are
missing.
(ii) Find the median of these data, and hence comment on the symmetry of the
data. [2]
[Total 4]
2 Two tickets are selected at random, one after the other and without replacement, from
a group of six tickets, numbered 1, 2, 3, 4, 5, and 6.
(i) Calculate the probability that the numbers on the selected tickets add up to 8.
[2]
(ii) Calculate the probability that the numbers on the selected tickets differ by
3 or more. [2]
[Total 4]
3 Let X be a random variable with moment generating function MX(t) and cumulant
generating function CX(t), and let Y = aX + b, where a and b are constants. Let Y have
moment generating function MY(t) and cumulant generating function CY(t).
(ii) Find the coefficient of skewness of Y in the case that MX(t) = (1 – t)–2 and
Y = 3X + 2 (you may use the fact that CY′″(0) = E[(Y − μY)3]). [5]
[Total 7]
CT3 S2009—2
4 Let the random variables (X,Y) have the joint probability density function
(i) Derive the marginal probability density functions of X and Y, and hence
determine (giving reasons) whether or not the two variables are independent.
[3]
Claim sizes for certain policies are modelled using an exponential distribution with
parameter λ. A random sample of such claims results in the value of the MLE of λ as
λˆ = 0.00124 .
A large claim is defined as one greater than £4,000 and the claims manager is
particularly interested in p, the probability that a claim is a large claim.
x 1 2 3 4
no. of y's 4 3 6 7
mean of y's 18.6 21.7 23.2 27.1
(ii) Suppose that you have been asked to provide a 95% confidence interval for
the slope coefficient.
(b) Indicate briefly any further information that you would need in order
to overcome these problems.
[3]
[Total 8]
8 The table below shows a bivariate probability distribution for two discrete random
variables X and Y:
9 In a group of motor insurance policies issued by a company, 80% of claims are made
on comprehensive policies and 20% are made on third-party-only policies.
(i) Calculate the average amount paid out on a claim, given that the average
amount paid out by the company on a comprehensive policy claim is £1,650,
and the average amount paid out on a third-party-only policy claim is £625.
[1]
(ii) Calculate the total expected amount paid out in claims by the company in one
year, given that the total number of policies is 150,000 and, on average, the
claim rate is 0.15 claims per policy per year. [2]
[Total 3]
CT3 S2009—4
10 Consider a population in which a proportion θ of members have some specified
characteristic. Let P denote the corresponding proportion of members in a random
sample of size n from the population.
(i) Explain clearly why the mean and standard error of P are given by
θ (1 − θ )
E [ P ] = θ, s.e.[ P ] = . [3]
n
In one part customers are asked to answer “yes” or “no” to a particular question.
(ii) Calculate the approximate probability that at least 150 “yes” answers are
found in the sample, on the assumption that the true (population) proportion of
“yes” answers is 0.7. [4]
Suppose the true (population) proportion of “yes” answers (θ) is unknown, and for a
random sample of 200 responses, the number of “yes” answers is found to be 146.
(iii) (a) Calculate an upper (one-sided) 95% confidence interval of the form
(0, L) for θ.
A: 21 22 28 27 20 23 26 32 25 21 30
B: 19 18 38 33 24 39 22 20 28 26 30
Σx A = 275, Σx 2A = 7, 033, ΣxB = 297, ΣxB2 = 8,559
(i) One of the colleagues suggested a graphical approach for the comparison of
the variances.
Draw a suitable diagram to represent these data so that the variability of the
samples can be compared, and comment briefly on that comparison. [3]
(ii) Another colleague suggested using an F-test for the comparison of variances.
(a) Perform this F-test at the 5% level to compare the variances and
express your conclusion clearly.
(b) In addition obtain an approximate value of the P-value for this test by
linearly interpolating between suitable entries in the tables.
[6]
(iii) The third colleague suggested another procedure using a two-sample t-test in
the following way:
(b) (1) Calculate the required sets of absolute deviations for the given
data.
(iv) Comment briefly on the conclusions that may have been reached by the three
colleagues. [2]
[Total 22]
CT3 S2009—6
12 A bank has a free telephone number for its customer services department. Often the
call volume is heavy and customers are placed on hold until a staff member is
available to answer. The bank hopes that a caller remains on hold until the call is
answered, so as not to upset or lose an existing or potential customer.
A survey was conducted to analyse whether callers would remain on hold longer (on
average), if they heard a recorded message containing: (A) an advertisement about the
bank’s products; (B) “easy listening” music; or (C) classical music. The bank
randomly selected a sample of five unanswered calls under each recorded message,
and the length of time (in minutes) that the caller remained on hold before hanging up
is given in the table below.
A: advertisement 5 1 11 2 8 27
B: easy listening music 0 1 4 6 3 14
C: classical music 13 9 8 15 7 52
Let μ A , μ B , μC denote the mean telephone holding times under recorded message A,
B and C respectively.
(i) (a) Perform an analysis of variance to test the hypothesis that the nature of
the recorded message has no effect on the length of time that callers
remain on hold. You should construct an appropriate ANOVA table
and state your conclusion clearly.
An equivalent approach for analysing the effects of the recorded messages on holding
time is the following:
(a) Calculate the predicted value for the telephone holding time when the
message contains classical music.
END OF PAPER
CT3 S2009—8
Faculty of Actuaries Institute of Actuaries
EXAMINERS REPORT
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
R D Muckart
Chairman of the Board of Examiners
December 2009
Comments for individual questions are given with the solutions that follow.
Faculty of Actuaries
Institute of Actuaries
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2009 — Examiners’ Report
Comments
The paper was answered quite well overall and there are no topics that stand out as being
particularly poorly attempted. Similarly there were no particular misunderstandings widely
evident, and no particular errors were made so repeatedly as to be worthy of comment.
1
7 2 f 2 60 4 f 4 90 60 35
(i) We have 60 f2 f 4 100 and 4. 1
100
2
(i) With sample space {(i,j), i = 1, …, 6, j = 1, …, 6, j i}
(that is, i is the number on the first ticket selected, j that on the second
selected) there are 30 equally likely outcomes.
Favourable outcomes are (2,6), (3,5), (5,3), (6,2)
so probability = 4/30 = 2/15 = 0.133 2
(ii) Favourable outcomes are
(1,4), (4,1), (1,5), (5,1), (1,6), (6,1), (2,5), (5,2), (2,6), (6,2), (3,6), (6,3)
so probability = 12/30 = 0.4 2
OR: Use a sample space of size 15: {(i,j)} where i is smaller number selected,
j is larger.
Then event (i) has 2 favourable outcomes and event (ii) has 6.
3
(i) MY(t) = E[etY] = E[et(aX+b)] = etbE[eatX] = ebtMX(at)
CY(t) = log MY(t) = bt + log MX(at) = bt + CX(at) 2
(ii) CY(t) = 2t + log(1 – 3t)–2 = 2t – 2log(1 – 3t) 1
Page 2
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2009 — Marking Schedule
4
x y x y x
(i) f X ( x) f ( x, y)dy e dy e e e . 1
0
0 0
x y y x y
fY ( y) f ( x, y)dx e dx e e e [OR by symmetry]. 1
0
0 0
x y
Since f X ,Y ( x, y ) e f X ( x) fY ( y ) , X and Y are independent. 1
xy
u v
(ii) FX ,Y ( x, y) e dvdu 1
00
x y
u u x v y
FX ,Y ( x, y) e du e v dv e e 1 e x
1 e y
1
0 0
0 0
5
E[ X ] xf ( x)dx 2x2 2
dx 1
0 0
2 2 2
x3 . 1
3 0 3
3 3
Consider Z X E[Z ] E[ X ] .
2 2
Z is an unbiased estimator of . 2
6
xi n xi
(i) L( ) Π e e 1
d n
log L( ) n log xi and log L( ) xi 1
d
ˆ n 1
Equate to zero for the MLE
Xi X
Page 3
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2009 — Examiners’ Report
7
(i) We need to calculate the basics sums ∑x, ∑x2, ∑y, ∑xy
n = 20
∑x = 4(1) + 3(2) + 6(3) + 7(4) = 56
∑x2 = 4(12) + 3(22) + 6(32) + 7(42) = 182
∑y = 4(18.6) + 3(21.7) + 6(23.2) + 7(27.1) = 468.4
∑xy = 1(4)(18.6) + 2(3)(21.7) + 3(6)(23.2) + 4(7)(27.1) = 1381.0
2
1 1
S xy 1381.0 (56)(468.4) 69.48 and S xx 182 (56)2 25.2 1
20 20
ˆ 69.48
2.757 1
25.2
ˆx 1
ˆ y [468.4 (2.757)56] 15.7 1
20
yˆ 15.7 2.757 x
ˆ2
(ii) (a) 95% CI for β is ˆ t0.025,18
S xx
So we need to calculate
2
1 1 S xy
ˆ2 ( yi ˆ ˆ x )2 or ( S yy ). 1
i
n 2 n 2 S xx
Problem as we do not have the individual yi values, only means of sets
of them.
(b) We would need these individual yi values (or the s.d. or y 2 for each
set). 2
8
X|Y = 2 takes values 0, 1, 2 with probabilities 1/8, 3/8, 4/8
(being in the ratios 1:3:4) 2
So E[X|Y = 2] = 1(3/8) + 2(4/8) = 11/8 = 1.375 1
Page 4
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2009 — Marking Schedule
9
(i) E(amount) = 0.8(1650) + 0.2(625) = 1,320 + 125 = £1,445 1
(ii) E(number of claims) = 150000(0.15) = 22,500 1
E(total claim amount) = 22500(1445) = £32,512,500
10
(i) Number of sample members with the characteristic X ~ bi(n,) with mean
n and variance n (1 – ). P = X/n. 1
E[P] = n / n = 1
s.e.[P] = {V[P]}1/2 = {V[X]/n2}1/2 = {n (1 – )/n2}1/2 = { (1 – )/n}1/2 1
(ii) X ~ bi(200, 0.7) with mean 140 and variance 42 2
149.5 140
P( X 150) P Z P( Z 1.466) 0.071 2
42
(iii) (a) Sample proportion P ~ N( (1 – )/200)
Observed P = 146/200 = 0.73
Estimated standard error(P) = (0.73×0.27/200)1/2 = 0.03139 1
P
Pr 1.645 0.95
e.s.e. P
Pr P 1.645 e.s.e. P 0.95
2
Upper 95% CI is given by (0, 0.73 + 1.645×0.03139)
i.e. (0, 0.782) 1
(b) By analogy with (i),
Lower 95% CI is given by (0.73 – 1.645×0.03139, 1)
i.e. (0.678, 1) 2
(c) The P–value indicates that the null hypothesis “ = 0.7” can stand
and we do not have to conclude that > 0.7. 1
The CI in (iii)(b) includes values down to 0.678, so all such values,
including 0.7, are consistent with the data when considering how
low a value of is reasonable. 1
The two results complement each other. 1
11
(i) Dotplots on same scale are most suitable
[alternatively boxplots or histograms are acceptable]
Page 5
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2009 — Examiners’ Report
2
The spread of the B data appears to be greater than that of the A data and so
casts some doubt on the equal variance assumption. 1
1 2752
(ii) (a) s 2A 7033 15.8
10 11
1 297 2
sB2 8559 54.0 1
10 11
sB2 54.0
F 3.418 on 10, 10 df 1
s 2A 15.8
For a two-sided test at the 5% level, critical value is
F10,10(2.5%) = 3.717 1
2 2
So we accept H 0 : A B at the 5% level. 1
(b) F10,10(2.5%) = 3.717 and F10,10(5%) = 2.978
So P-value is between 0.05 and 0.10 1
By interpolation: P-value is
3.717 3.418
0.05 (0.10 0.05) 0.05 (0.405)(0.05) 0.070 1
3.717 2.978
(iii) (a) If the samples have equal variances, then the absolute deviations will
be similar in size for both samples; if one sample has a larger variance
than the other, then the deviations will be more extreme such that the
absolute deviations will be larger for that sample.
A two-sided two-sample t-test applied to these absolute deviations
will test for a difference in the means of these absolute deviations
and hence for a difference in the variances in the original samples. 2
275
(b) (1) xA 25
11
So the deviations for sample A , i.e. d A | xA xA | , are
4 3 3 2 5 2 1 7 0 4 5 1
Page 6
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2009 — Marking Schedule
297
xB 27
11
So the deviations for sample B , i.e. d B | xB xB | are
8 9 11 6 3 12 5 7 1 1 3 1
(2) Calculations:
dA 36, d A2 158 and dB 66, d B2 540
36 2 1 362
dA 3.273 and sdA 158 4.018
11 10 11
66 2 1 662
dB 6.000 and sdB 540 14.400
11 10 11
1
2 10(4.018) 10(14.400)
sdp 9.209 sdp 3.035 1
20
3.273 6.000 2.727
obs. t = 2.107 on 20 df 1
1 1 1.294
3.035
11 11
For the two-sided test at the 5% level, critical value is
t20(2.5%) = 2.086 1
2 2
So we just reject H 0 : dA dB and hence H 0 : A B
at the 5% level. 1
(3) t20(2.5%) = 2.086 and t20(1%) = 2.528
So P-value is between 0.02 and 0.05 1
By interpolation: P-value is
2.528 2.107
0.02 (0.03) 0.02 (0.952)(0.03) 0.049 1
2.528 2.086
(iv) Tests in (ii) and (iii) give different results at the 5% level, but in fact have
quite similar P-values.
Graphical approach in (i) casts doubt on H0.
So all three are fairly consistent. 2
12
2
(i) (a) yA = 27, yB = 14, yC = 52 , y = 93, y = 865
Page 7
Subject CT3 (Probability and Mathematical Statistics Core Technical) — September 2009 — Examiners’ Report
2 2 2 2
SSB = (27 + 14 + 52 )/5 93 /15 = 149.2 2
SSR = 288.4 149.2 = 139.2
Source of variation d.f. SS MSS
Between 2 149.2 74.6
Residual 12 139.2 11.6
Total 14 288.4
2
F = 74.6/11.6 = 6.431 on (2,12) degrees of freedom. 1
From yellow tables, F2,12(0.05) = 3.885 and F2,12(0.01) = 6.927. 1
We can reject the hypothesis of “no message effect” at the 5%
significance level, but not at the 1% level. We have some evidence
against the “no message effect” hypothesis and conclude that there
is a message effect. 1
(b) t12(0.025) = 2.179 1
0.5
1 1
95% CI is (5.4 10.4) 2.179 11.6 2
5 5
Page 8