A&J Flashcards for

Exam P/1
1st Edition

Alvin Soh
Outline

A) Combinatorial Analysis
B) Basic Probability and Set Theory
C) Conditional Probability and Bayes Formula
D) Discrete Random Variables
E) Discrete Probability Distribution
F) Continuous Random Variables
G) Continuous Probability Distribution
H) Jointly Distributed Random Variables with its Applications
I) Jensen Inequality and Chebyshev’s Inequality
J) Application of Probability in Risk Management

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Basic Probabilities and Set Theory

Distributive Law

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Basic Probabilities and Set Theory

 A  B C  AC  BC
 AB  C   AC    BC 

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Basic Probabilities and Set Theory

De Morgan’s Law

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Basic Probabilities and Set Theory

C
 n  n

  Ei    Ei
C

 i 1  i 1

C
 n  n

  Ei    Ei
C

 i 1  i 1

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Basic Probabilities and Set Theory

Law of Total Probability

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Basic Probabilities and Set Theory

n  A  n  AB   n  AC   n  AD 

Pr  A  Pr  AB   Pr  AC   Pr  AD 

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Conditional Probability and Bayes Formula

Bayes Formula

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Conditional Probability and Bayes Formula

Pr  AB  Pr  B | A Pr  A
Pr  A | B   
Pr  B     
Pr  B | A Pr  A  Pr B | AC Pr AC

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Discrete Random Variables

Characteristics of Probability Mass Function

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Discrete Random Variables

1. f ( x)  Pr( X  x)
2. f ( x)  0, x 

3.  f ( x)  1
x

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Discrete Random Variables

k th moment

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Discrete Random Variables

  
E Xk  x k f ( x)   xk Pr  X  x 
x: f ( x ) 0 x: f ( x ) 0

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Discrete Probability Distribution

If X follows binomial distribution, find:

1. Probability Mass Function
2. Expected Value
3. Variance

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Discrete Probability Distribution

The distribution is commonly represented by

n
X ~ Bin  n, p  , with Pr  X  x     p x 1  p  , where
n x

 x
x  0,1,..., n , n and p are parameters for this distribution.

E  X   np Var  X   np 1  p 

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Continuous Random Variable

Transformation of Random Variables

using
“CDF” Method

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Continuous Random Variable

  
Pr Y  g  X    Pr X  g 1 Y  or Pr X  g 1 Y  
depending on the function, g

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Continuous Random Variable

Transformation of Random Variables

using
“Inverse Transformation” Method

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Continuous Random Variable

If Y  g  X  , g '  X   0 , x  then the p.d.f of Y is

fY  y   f X  h  y   h'  y  , where h  y   g 1  y 

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Continuous Probability Distribution

If X follows Exponential distribution, find:

1. Probability Density Function
2. Expected Value
3. Variance
4. Moment-Generating Function

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Continuous Probability Distribution

 1 x
 e , x0
f  x   
0 ,
 elsewhere

x
1 y 
x
F  x    e  dy  1  e 
0


E X   Var  X    2

1
M X t  
1t

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Application of Probability in Risk Management

Relationship between the expected payment and the expected

payment with deductible

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Application of Probability in Risk Management

E  X   E  X ^ d   E  X  d   whereby,

d  d
E  X ^ d    xf ( x)dx  d  f ( x)dx   S  x  dx
0 d 0

 
E  X  d      x  d  f ( x)dx   S  x  dx
d d

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Application of Probability in Risk Management

Coinsurance

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Application of Probability in Risk Management

E  Payment   E  1    X   1    E  X 

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Application of Probability in Risk Management

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