CT3 Past Exams 2005 - 2009

Faculty of Actuaries
Institute of Actuaries
EXAMINATION
12 April 2005 (am)
Subject CT3
Probability and Mathematical Statistics

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
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.
3.
Mark allocations are shown in brackets.
4.
Attempt all 13 questions, beginning your answer to each question on a separate sheet.
5.
Candidates should show calculations where this is appropriate.
Graph paper is required for this paper.
AT THE END OF THE EXAMINATION

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.
CT3 A2005
Calculate the sample mean and standard deviation of the following claim amounts ():
534
671
581
620
401
340
980
845
550
690
[3]
Suppose A, B and C are events with P ( A) = 12 , P ( B ) = 12 , P(C ) = 13 , P ( A

P( A
C ) = 16 , P ( B
(a)
(b)
Determine whether or not the events A and B are independent.

Calculate the probability P( A B C ).
C) =
1
6
and P ( A
B ) = 34 ,
1 .
C ) = 12
[4]
Claim sizes in a certain insurance situation are modelled by a distribution with

moment generating function M(t) given by
M(t) = (1 10t) 2.
Show that E[X 2] = 600 and find the value of E[X 3].
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]
[3]
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]
In a survey conducted by a mail order company a random sample of 200 customers

yielded 172 who indicated that they were highly satisfied with the delivery time of
their orders.
Calculate an approximate 95% confidence interval for the proportion of the
company s customers who are highly satisfied with delivery times.
[3]
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.
CT3 A2005
[5]
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]
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.
It is required that the probability of rejecting H0 when = 0.8 should be

approximately 0.05, and the probability of not rejecting H0 when = 1.2 should be
approximately 0.1.
(i)
Show that the test requires

k 0.8
3/ n
where
(ii)
0.95 and
k 1.2
3/ n
0.10
is the standard normal distribution function.
[4]
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).
Calculate the approximate level of significance of the test, and comment on
the value.
[3]
[Total 7]
CT3 A2005
PLEASE TURN OVER
10
A model used for claim amounts (X, in units of 10,000) in certain circumstances has
the following probability density function, f(x), and cumulative distribution function,
F(x):
f ( x) =
5(105 )
(10 x)
, x
6
0 ; F ( x) = 1
10
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]
(ii)
(a)
Show that we can obtain a simulated observation of X by calculating

x = 10 (1 r )
0.2
where r is an observation of a random variable which is uniformly

distributed on (0,1).
(b)
Explain why we can just as well use the formula

x = 10 r
0.2
to obtain a simulated observation of X.

(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
0.0291
0.2770
0.5895
0.1131
0.9897
0.6875
0.8525
0.0016
0.5154
6,141
10,2872
29,272
11,148
54,635
207
7,782
3,243
?
?
[5]
[Total 7]
CT3 A2005
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
Preparation A
Preparation B
Preparation C
43
73
84
46
40
55
63
91
For these data
y = 1, 203 ,
65
61
51
84
51
65
72
71
33
39
54
62
387
254
270
292
y 2 = 77, 249 .
(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:
Control
Preparation A
Preparation B
Preparation C
(iii)
?
9.5
16.5
?
?
8.5
?
?
16.6
2.5
16.5
?
2.6
1.5
4.5
2
15.4
9.4
5.6 13.6
(b)
Make a rough plot of the residuals against the treatment means.
(c)
State the assumptions underlying the analysis of variance test

conducted in part (i).
(d)
Comment on how well the data conform to these assumptions in the

light of the residual plot.
[8]
It is suggested that any differences can be explained in terms of a difference

between controls on the one hand and treated groups on the other.
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]
CT3 A2005
PLEASE TURN OVER
12
(i)
A random variable Y has a Poisson distribution with parameter but there is a

restriction that zero counts cannot occur. The distribution of Y in this case is
referred to as the zero-truncated Poisson distribution.
(a)
Show that the probability function of Y is given by

y
p( y ) =
(ii)
y !(1 e )
( y = 1, 2, ).
(b)
Show that E[Y ] = /(1 e ).
[4]
(a)
Let y1, , yn denote a random sample from the zero-truncated Poisson

distribution.
Show that the maximum likelihood estimate of
by the solution to the following equation:
y
may be determined
= 0,
1 e
and deduce that the maximum likelihood estimate is the same as the
method of moments estimate.
(b)
(iii)
Obtain an expression for the Cramer-Rao lower bound (CRlb) for the
variance of an unbiased estimator of .
[9]
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
Frequency of cars
1
1,486
2
694
3
195
4
37
5
10
6
1
The above data were modelled by a zero-truncated Poisson distribution as

given in (i).
The maximum likelihood estimate of is = 0.8925 and the Cramer-Rao
lower bound on variance at = 0.8925 is 5.711574 10 4 (you do not need to
verify these results.)
CT3 A2005
(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.
(b)
Calculate an approximate 95% confidence interval for and hence

calculate a 95% confidence interval for the mean of the zero-truncated
Poisson distribution.
[9]
[Total 22]
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:
Region
Mortality rate m (per 10,000)
Sickness rate s (per 1,000)
1
2
3
4
5
6
7
8
9
10
125.2
119.3
125.3
111.7
117.3
100.7
108.8
102.0
104.7
121.1
206.8
213.8
197.2
200.6
189.1
183.6
181.2
168.2
165.2
228.5
Data summaries:
m = 1136.1,
(i)
m2 = 129,853.03, s = 1934.2,
s2 = 377,700.62, ms = 221,022.58
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
EXAMINATION
April 2005
Subject CT3

Core Technical
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
Subject CT3 (Probability and Mathematical Statistics Core Technical)
April 2005
Examiners Report
x = 6212 , x2 = 4186784
6212
= 621.20
10
1
62122
4186784
9
10
(a)
P( A
B)
327889.6
9
P( A) P( B ) P( A
P ( A) P( B) ( 12 )( 12 )
(b)
P( A
B)
P( A
1
2
1
3
1
2
3
4
1
2
1
4
so the events A and B are independent as
P( A) P ( B) P(C ) P( A
1 1
3 4
1
6
C)
P( A
1
6
1
12
5 .]
6
[OR P ( A
3
4
B)
P( A) P( B).
C)
1
2
1
4
= 190.87
1
6
1 1
6 12
B) P( A
C ) P( B C )
P( A B
C)
5
6
B ) P (C ) P ( A
C ) P( B
C ) P( A
C)
[OR Use a Venn diagram]
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
M (t) = ( 2400)( 10)(1 10t) 5 = 24000(1 10t)
Putting t = 0
Putting t = 0
E[X2] = 600
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]
X ~ N 25, 0.25
P X
Page 2
26
P Z
26 25
0.5
P Z
1 0.97725 0.02275
n 1 S2
5S 2 ~
x
n
172
200
2
20 =
40, so V[S2] = 40/25 = 1.6
0.86
95% CI is p 1.96
0.86
Examiners Report
2
20
V[5S2] = variance of
April 2005
p (1 p )
n
1.96(0.0245)
0.86
0.048 or (0.812, 0.908)
Let S = X1 + X2 + . . . + XN be the total claim amount.

Note that E[N] = V[N] = 10, E[X] = 4/(1/5) = 20, V[X] = 4/(1/5)2 = 100
E[S] = E[N]E[X] = 10(20) = 200
mean of total claim amount = 20,000.
V[S] = E[N]V[X] + V[N]{E[X]}2
=10(100) + 10(20)2 = 5000
s.d.[S] = 70.71
(i)
s.d. of the total claim amount = 7,071
Width of 95% confidence interval: 1.96
120
120
[or 2 1.96
n
n
3.92
120
]
n
120
23.52
100
120
[or 2 1.96
47.04]
100
1.96
(ii)
For the width of a 95% confidence interval to be at most

120
1.96
10
n
1.96 120
10
23.52 , n
10 we require
553.19
i.e., take the sample size as 554.
Page 3
(iii)
The confidence interval in (ii) in narrower

much larger sample size.
(i)
X approx
0.05
32
n
April 2005
Examiners Report
to achieve this we require a
for large n by the central limit theorem.
P(reject H0| = 0.8) = P( X > k| = 0.8)

k 0.8
3/ n
=1
k 0.8
3/ n
0.95
and
0.1
P(do not reject H0| = 1.2)
= P(X
1.2)
k 1.2
3/ n
(ii)
k|
Significance level
1
= P(reject H0 when H0 is true) = P ( X
1.025 1
3 / 482
k|
1)
(0.18) 1 0.57 0.43.
The significance level of the test is very high (43%).
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).
(ii)
(a)
Solving r = F(x)
(b)
R ~ U(0,1) 1 R ~ U(0, 1) so (1 r) is also a random number from

(0, 1), so we can use 1 r in place of r , giving the formula
x 10 r
(c)
Page 4
0.2
r = 0.0016
r = 0.5154
(1 + x/10) = (1 r)
claim = 262390
claim = 14175
0.2
x = 10[(1
r)
0.2
1]
(i)
SST = 77249 12032/20 = 4888.55

SSB = 3872/8 + 2542/4 + 2702/4 + 2922/4
SSR = 2857.875
Examiners Report
12032/20 = 2030.675
H0: no treatment effects (i.e. population means are equal) v H1: not H0
Analysis of Variance
Source
DF
SS
Factor
3
2031
Error
16
2858
Total
19
4889
MS
677
179
F
3.79
F3,16(0.05) = 3.239, F3,16(0.01) = 5.292

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.
(ii)
(a)
Residual = observed value treatment mean

Treatment means are: Control 48.375, A 63.5, B 67.5, C 73.0
Missing values are:
Control
Preparation A
Preparation B
Preparation C
5.4
9.5
16.5
27
8.4
8.5
4.5
18
16.6
2.5
16.5
11
2.6
1.5
4.5
2
15.4
9.4
5.6
13.6
(b)
20
10
resids
11
April 2005
-10
-20
-30
means
treatment
50
Control
60
70
Page 5
(iii)
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.
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.
One could perform a two-sample t-test of control mean = treatment mean
by combining the data for the 3 preparations (and using samples of sizes 8
and 12).
12
(i)
(a)
The probability function for the zero-truncated Poisson distribution is

given by
P (Y
y |Y
P(Y
0)
y and Y
P(Y 0)
e
y !(1 P(Y
y
0))
( y 1, 2, ).
y !(1 e )
(b)
Expectation of Y:
y
E[Y ]
y
y 1
y !(1 e )
z
(1 e )
(1 e
Page 6
z 0
[1]
e
z!
(z
.
(1 e
y 1)
0)
(ii)
(a)
The log likelihood function for
April 2005
Examiners Report
is:
log L( )
yi log
n log(1 e )
constant
i 1
d log L( )
d
ny
n n
e
1 e
the ML estimate is determined by the solution of the equation

d log L( )
d
1 e
As this equation may be rewritten as

y
and E[Y ]
1 e
1 e
the ML estimate is the same as the method of moments estimate.

(b)
d2
d
ny
log L( )
and since E[Y ] E[Y ]
e
(1 e ) 2
(1 e )
, the Cramer-Rao lower bound is
given by,
CRlb
E
or
d
d
log L( )
(1 e ) 2
n(1 e
e )
1
(1 e )
e
(1 e ) 2
Page 7
(iii)
(a)
April 2005
Examiners Report
The expected frequencies for the fitted zero-truncated Poisson model

are given by
y
( y 1, 2, ) where
0.8925 and n
2423
y !(1 e )
y
ei
fi
1
1500.48
1486
2
669.59
694
3
199.20
195
4
44.45
37
( fi ei ) 2
(1486 1500.48) 2
=
ei
1500.48
(on 4 df).
2
5
7.93
10
6
1.35
1
Total
2423.00
2423
(1 1.35) 2
= 2.99
1.35
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.
[OR
(b)
= 2.68 on 3 df if
5 combined rather than 6.]
As approx. ~ N ( , CRlb) for large n, a 95% confidence interval for

is given by
1.96 CRlb
0.8925 1.96 5.711574 10
at
, since CRlb
5.711574
= 0.8925,
= 0.8925 1.96(0.0238989) = 0.8925

= (0.84566, 0.93934)
0.04684
Then the 95% confidence interval for the mean of Y ,

by
0.84566
1 e
Page 8
10-4
0.84566
0.93934
1 e
0.93934
= (1.48, 1.54).
1
, is given
1 e
13
(i)
April 2005
Smm = 129853.03
(1136.1)2/10 = 780.709
Sss = 377700.62
(1934.2)2/10 = 3587.656
Sms = 221022.58
(1136.1)(1934.2)/10 = 1278.118
1278.118
(780.709)(3587.656)
H0:
= 0 v. H1:
r 8
1 r2
3.35
Examiners Report
0.764
>0
Prob-value = P(t8 > 3.35) = 0.005 from tables.
[OR use Fisher s transformation]

(ii)
Given the issue of whether mortality can be used to predict sickness, we

require a plot of sickness against mortality:
There seems to be an increasing linear relationship such that mortality could

be used to predict sickness.
Page 9
1278.118
1.6371 and
780.709
(iii)
1
[1934.2
10
April 2005
Examiners Report
(1136.1)] 7.426
1
(1278.118) 2
{3587.656
} 186.902
8
780.709
2
Var[ ]
Test H0:
t
0.2394
780.709
= 2 v. H1:
1.6371 2
0.2394
<2
0.74 on 8 df
Prob-value large; no evidence to reject H0: = 2

So we can accept that the slope is as large as 2.
(iv)
For a region with m = 115:

estimated expected s = 7.426 + 1.6371(115) = 195.69
with variance =
1
{
10
(115 113.61) 2
} 19.1528
780.709
95% confidence limits are:

195.69
t8(s.e.)
195.69
2.306(4.376)
195.69
10.09 or (185.60, 205.78)
END OF EXAMINERS REPORT
Page 10
EXAMINATION
13 September 2005 (am)
Subject CT3

Core Technical
1.
booklet.
2.
supervisor.
3.
4.
5.

question paper.
CT3 S2005
The table below gives the number of thunderstorms reported in a particular summer
month by 100 meteorological stations.
Number of thunderstorms:
Number of stations:
0
22
1
37
2
20
3
13
4
6
5
2
(a)
Calculate the sample mean number of thunderstorms.
(b)
Calculate the sample median number of thunderstorms.
(c)
Comment briefly on the comparison of the mean and the median.

[3]
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]
Claim amounts on a certain type of policy are modelled as following a gamma

distribution with parameters = 120 and = 1.2.
Calculate an approximate value for the probability that an individual claim amount
exceeds 120, giving a reason for the approach you use.
[3]
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]
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]
A random sample of 16 observations was selected from each of four populations.

Given that the between treatments mean square is 280 and the total sum of squares is
SST = 1,500, construct an analysis of variance table and test the null hypothesis that
the means of the four populations are equal.
[3]
CT3 S2005
A sample of 20 claim amounts () on a group of household policies gave the

following data summaries:
x = 3,256 and
x2 = 866,600.
(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]
A simple procedure for incorporating a no claims discount into an annual insurance

policy is as follows:
a premium of 400 is payable for the first year;
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 no subsequent claims are made in future years, the premium remains as
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
400
with probability
400k with probability
400k2 with probability
p
p(1 p)
(1 p)2
where p is the probability of a claim being made in any year.
[3]
(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]
CT3 S2005
PLEASE TURN OVER
Random samples are taken from two independent normally distributed populations
(with means 1 and 2 respectively) with the following results.
Sample from population 1:
sample size n1 = 11, sample mean x1 124 , sample variance s12
59
Sample from population 2:

sample size n2 = 15, sample mean x2 105 , sample variance s22
42
Calculate a 95% confidence interval for 1

2, the difference between the
population means (you may assume that the population variances are equal).
[5]
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.
In the case that n is large, determine the approximate distribution of
1 n
Y =
Yi , stating its expectation. (You are not required to derive or state
n i1
the variance of Y .)
[1]
(iv)
CT3 S2005
Comment on the comparison of the conditional expectation of X given X < 800

with the expectation of Y.
[2]
[Total 8]
11
Consider the following simple model for the number of claims, N, which occur in a
year on a policy:
0
0.55
n
P(N = n)
1
0.25
2
0.15
3
0.05
(a)
Explain how you would simulate an observation of N using a number r, an

observation of a random variable which is uniformly distributed on (0, 1).
(b)
Illustrate your method described in (i) by simulating three observations of N

using the following random numbers between 0 and 1:
0.6221, 0.1472, 0.9862.
[4]
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.
(a)
Explain why the xi s come from a truncated exponential distribution

with density function
f ( x) = k . e
, 5
e5 .
and show that k

(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]
CT3 S2005
PLEASE TURN OVER
(ii)
A second investigator ignores the actual policy durations and simply notes the
values of m and n.
(a)
Write down the likelihood for this information and hence show that the
resulting MLE of is given by
=
(b)
1
m n
log
.
5
n
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
L( ) = (1 e
)m .
xi
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

comparison of the three MLE s.
equal to 0.508, comment on the

[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.
(i)
Suppose one of the 220 people surveyed is selected at random.

Calculate the probabilities that the selected person:
(a)
(b)
(c)
(ii)
CT3 S2005
intends to return next year, given that he/she has made a purchase
intends to return next year, given that he/she has not made a purchase
has made a purchase, given that he/she intends to return next year
[3]
By testing the difference between the proportions of purchasers and nonpurchasers 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]
14
(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]
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.
1
1
Quarter (i):
Number of deaths (ni):
(i)
2
2
3
3
4
1
5
4
6 7 8 9
9 18 23 31
10
20
11
25
12
37
(a)
Draw a scatterplot of the data.
(b)
Comment on the nature of the relationship between the number of

deaths and the quarter in this early phase of the epidemic.
[4]
(ii)
A statistician has suggested that a model of the form
E Ni = i 2
might be appropriate for these data, where is a parameter to be estimated
from the above data. She has proposed two methods for estimating , and
these are given in parts (a) and (b) below.
(a)
Show that the least squares estimate of , obtained by minimising

q=
12
(n
i 1 i
(b)
i 2 ) 2 , is given by
12 2
i ni
i 1
12 4
i
i 1
Show that an alternative (weighted) least squares estimate of ,

obtained by minimising q* =
(c)
12
n
i 1 i
12 2
i
i 1
Noting that
12 4
i
i 1
12
i 1
i2
ni
i2
is given by
= 60, 710 and
12 2
i
i 1
= 650 , calculate
and
for the above data.

[8]
CT3 S2005
PLEASE TURN OVER
(iii)
To assess whether the single parameter model which was used in part (ii) is
appropriate for the data, a two parameter model is now considered. The model
is of the form
E Ni = i
for i = 1,
(a)
, 12.
To estimate the parameters and , a simple linear regression model

E Yi =
xi
is used, where xi = log(i) and Yi = log(Ni) for i = 1, , 12. Relate the

parameters and to the regression parameters and .
(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
EXAMINATION
September 2005
Subject CT3

Core Technical
EXAMINERS REPORT
September 2005
Examiners Report
150
1.5
100
(a)
(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).
Let X denote the number in the sample who support party A.

X ~ Binomial(275, 0.45)
E[X] = 275 0.45 = 123.75
V[X] = 275 0.45 0.55 = 68.0625
The normal approximation to the binomial gives, using a continuity correction,
P( X
116)
P( X
115.5) 1
Gamma(120, 1.2) has mean
115.5 123.75
68.0625
( 1)
120
120
100 and variance
1.2
1.22
(1) 0.841
83.333
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)
P X
120
P Z
120 100
9.129
2.191
1 0.98578 0.0142
Sample proportion = 0.83

99% CI for the population proportion is 0.83
i.e. 0.83 0.0968 i.e. (0.733, 0.927)
99% CI for percentage is thus (73.3% , 92.7%)
Page 2
[2.5758
(0.83 0.17/100)1/2]
September 2005
Examiners Report
n = 500 is very large, so the Central Limit Theorem justifies normality.

95% CI is x 1.96
237 1.96
s
n
137
500
237 12.0 or (225.0, 249.0)
6
Source of variation
Between groups
Residual
Total
d.f.
3
60
63
SS
840
660
1500
MSS
280
11
F = 280/11 which equals 25.45.

Therefore there is overwhelming evidence to suggest that the four population
means are not equal (F3,60(5%) = 2.758, F3,60(1%) = 4.126).
(a)
1
(3256) 162.8
20
1
32562
866600
19
20
17711.7
s 133.1
(b)
Distribution must have strong positive skewness

since the s.d. is large relative to the mean and the amounts must be positive.
(i)
Using C for a claim, N for no claim, then

P(premium = 400) = P(C in year 3, regardless of the first 2 years) = p
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
(ii)
E(premium) = 400.p + 400k.p(1 p) + 400k2.(1

= 400{p + kp(1 p) + k2(1 p)2}
(iii)
For E(premium) = 300 when p = 0.1

then 0.1 + 0.09k + 0.81k2 = 0.75
0.81k2 + 0.09k
0.092 4(0.81)(0.65)
1.62
0.09
k
k
September 2005
Examiners Report
p)2
0.09 1.454
1.62
0.65 = 0
for 0 k 1
0.84
Pooled estimate of common population variance =
10 59
14 42
10 14
49.0833
t24 (0.025) = 2.064

95% CI for
124 105
10
is given by
2.064
49.0833
1 1
11 15
1/ 2
i.e. 19 5.74 i.e. 13.3 , 24.7
X ~ U(0,1000) , Y = min(X,800)
(i)
P( X
x| X
800)
P( X
x and X 800)
P ( X 800)
P( X x)
for 0 < x < 800
800 /1000
x /1000
800 /1000
x
for 0
800
x 800
so the conditional distribution is U(0,800)

[other reasonable arguments were given credit, e.g. the conditional
distribution is simply a scaled version of the original uniform distribution on a
restricted range .]
(ii)
E[Y] = E[X|X < 800] P(X < 800) + 800 P(X
400
= 480
Page 4
800
1000
800
200
1000
800)
September 2005
Examiners Report
(iii)
Y is approximately normal with expectation 480 by Central Limit Theorem
(iv)
E[X | X < 800] = 400 whereas E[Y] = 480.

The higher value for E[Y] results from 20% of the Y values being 800 (and
80% being between 0 and 800).
11
(a)
For 0 r < 0.55

0.55 r < 0.8
0.8 r < 0.95
0.95 r 1
n=0
n=1
n=2
n=3
[OR any equivalent allocation which reflects the probabilities of the 4 values
of N.]
12
(b)
0.6221
0.1472
0.9862
(i)
(a)
n=1
n=0
n=3
The xi s are known to be such that xi

is a scaled form of e
5 , therefore have density which
for 5 < x < .
The scaling constant k is such that
k. e
dx 1
k[ e
]5
k .e
e5
[Note: this can be argued in other ways; e.g. by referring to a

conditional density and dividing by P(X > 5)]
Page 5
(b)
xi
e5 e
L( )
n 5n
September 2005
Examiners Report
xi
i 1
log L( )
n log
d
log L( )
d
5n
xi
5n
xi
n
equate to zero for MLE
xi 5n
i 1
[OR It could be noted that X 5 ~ exp( ) and that the MLE is

therefore the reciprocal of the mean of the data ( xi 5) giving the
required answer]
(ii)
(c)
n = 10, xi = 71
(a)
L( ) (1 e
log L( )
10
71 50
) m (e
m log(1 e
d
5me
log L( )
d
1 e
n
m n
)n
) n log(e
5
5
0.476
5n
1 e
n
m
1
m n
log(
)
5
n
[OR Reason via the MLE for a binomial p = P(X > 5) such that
n
p
and p e 5 ]
m n
(b)
Page 6
m = 120, n = 10
0.513
(iii)
(a)
(1 e
September 2005
Examiners Report
)m is the likelihood of observing m policies with duration < 5

xi
is the likelihood of observing the actual durations x1,
, xn
i 1
and independence leads to the product of these

log L( )
m log(1 e
d
5me
log L( )
d
1 e
) n log
n
xi
xi
equate to zero and the solution gives the MLE.

(b)
All three are re-assuringly close.

The pooled estimate is between the first two (as expected, but it is
closer to 0.513).
13
return
no return
purchase
69
32
101
no purchase
68
137
51
83
119
220
(i)
(a)
(b)
(c)
69/101 (= 0.6832)
68/119 (= 0.5714)
69/137 (= 0.5036)
(ii)
H0: population proportions of those who intend to return are equal

v H1: not H0
Proportion of purchasers
2
69 /101 ; proportion of non-purchasers
68 /119
Under H0, estimate of common proportion who intend to return = 137/220

Observed value of D
0.1117
137 83 1
1
Estimated standard error of D =
220 220 101 119
1/ 2
0.06558
Page 7
P-value = 2
=2
September 2005
Examiners Report
P(D > 0.1117) = 2 P(Z > 0.1117/0.06558) = 2

(1 0.95543) = 0.08914 (i.e. 8.9%)
P(Z > 1.70)
There is not sufficient evidence (using a two-sided test) to justify rejecting H0

i.e. there is not sufficient evidence to justify concluding that the intention to
return depends on whether or not a purchase was made.
(iii)
H0: no association between attributes v H1: not H0

Expected frequencies under H0 in brackets:
return
no return
Test statistic = 6.12
P-value = P
2
1
1
62.9
2.90
purchase
69 (62.9)
32 (38.1)
101
no purchase
68 (74.1)
51 (44.9)
119
1
1
1
74.1 38.1 44.9
137
83
220
2.90
1 0.9114 0.0886 (i.e. 8.9%)
There is not sufficient evidence to justify rejecting H0 i.e. there is not

sufficient evidence to justify concluding that the intention to return is
associated with purchasing status.
(iv)
The two approaches complement each other:

the P-values are the same
the conclusions are the same.
[Note: there is a formal connection: the
the z value in (ii) (1.70).]
Page 8
2
1 value
in (iii) (2.90) is the square of
(i)
(a)
Examiners Report
Points are shown on scatterplot.

40
Number of deaths
14
September 2005
30
20
10
0
0
10
Quarter
(b)
The mean number of deaths increases with an increasing rate with

quarter.
The variance also appears to increase with quarter.
(ii)
(a)
i 2 )2
(ni
dq
d
2 i 2 (ni
dq
d
2 i 2 (ni
0
i 2 ni
i4
i 2 ni
i4
(
d 2q
d
i2 )
i2 ) 0
2 i4
minimum.)
Page 9
(b)
q*
(ni
dq*
d
i 2 )2
ni
i
i2
dq*
d
ni
i
September 2005
i2
ni
ni
i2
d 2 q*
d
i2
i 2 ni
(c)
ni
i
(iii)
(a)
E Ni
15694
60710
174
650
minimum.)
0.259
0.268
Taking logs gives
log E Ni
Thus
[OR
(b)
log( i ) = log
= log and
log(i ) log
= .
e and
.]
= 1.6008 s.e.( ) = 0.2525

H0 :
t
= 2 v H1 :
2
s.e.( )
1.6008 2
0.2525
1.58
Compare with a t-distribution with 10 d.f.
Page 10
xi
Examiners Report
September 2005
Examiners Report
As the 5% critical value of a two-tailed test is 2.228, do not reject the

null hypothesis.
Therefore, the model used in (ii) with
= 2 seems appropriate.
Page 11
EXAMINATION
30 March 2006 (am)
Subject CT3

Core Technical
1.
booklet.
2.
supervisor.
3.
4.
5.

question paper.
CT3 A2006
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
5
6
6
7
7
8
8
9
9
3
6
02
5779
122344
556677899
1123444
567778
024
6
Determine the median surrender value for this batch of policies.
[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]
A random sample of size 10 is taken from a normal distribution with mean

variance 2 = 1.
= 20 and
Find the probability that the sample variance exceeds 1, that is find P(S2 > 1).
[3]
In a one-way analysis of variance, in which samples of 10 claim amounts () from

each of three different policy types are being compared, the following means were
calculated:
y1
276.7 ,
y2
254.6 ,
y3
296.3
with residual sum of squares SSR given by

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
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.
(i)
Use a Poisson approximation to the binomial distribution to calculate an

approximate value for the probability that there are at most 4 policies with
claims in the two cases where (a) p = 0.1 and (b) p = 0.2.
[3]
(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]
One variable of interest, T, in the description of a physical process can be modelled as

T = XY where X and Y are random variables such that X ~ N(200, 100) and Y depends
on X in such a way that Y|X = x ~ N(x, 1).
Simulate two observations of T, using the following pairs of random numbers
(observations of a uniform (0, 1) random variable), explaining your method and
calculations clearly:
Random numbers
0.5714 , 0.8238
0.3192 , 0.6844
[6]
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
(ii)
State the value of the maximum likelihood estimate of .
CT3 A2006 3
for this sample.

[3]
[2]
[Total 5]
PLEASE TURN OVER
The events that lead to potential claims on a policy arise as a Poisson process at a rate
of 0.8 per year. However the policy is limited such that only the first three claims in
any one year are paid.
(i)
Determine the probabilities of 0, 1, 2 and 3 claims being paid in a particular

year.
[2]
(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]
The total claim amount on a portfolio, S, is modelled as having a compound

distribution
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
CS(t) =
MX(t) 1}.
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

variance 10.
CT3 A2006 4
= 20 and X has mean 20 and

[2]
[Total 6]
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.
percentage
frequency
(ii)
< 10
22
10 25
76
25 50
73
> 50
49
(a)
Present these data graphically using a carefully drawn histogram.
(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]
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.
<10
percentage in type of trust

10 25
25 50
>50
1
8
10
3
very satisfied
quite satisfied
a little disappointed
very disappointed
6
29
37
4
7
36
28
2
6
27
15
1
In order to investigate whether there is any relationship between the percentage in

such trusts and satisfaction with current return, a 2 test is to be performed.
(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.
<10
satisfied
disappointed
9
13
percentage in type of trust

10 25
25 50
>50
35
41
43
30
33
16
Perform the required 2 test at the 5% level using this reduced table and
comment on your conclusion.
[7]
[Total 19]
CT3 A2006 5
PLEASE TURN OVER
11
An actuary has been advised to use the following positively-skewed claim size
distribution as a model for a particular type of claim, with claim sizes measured in
units of 100,
f ( x; )
x2
2
exp
: 0
with moments given by E[X] = 3 , E[X2] = 12
0
2
and E[X3] = 60 3.
(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.
Show that the maximum likelihood estimator (MLE) of
is given by
and show that it is unbiased for .

(iii)
A sample of n = 50 claim sizes yields xi
X
3
[5]
313.6 and xi2
2, 675.68 .
(a)
Calculate the MLE
(b)
Calculate the sample variance and comment briefly on its comparison

with the variance of the distribution evaluated at .
(c)
Given that the sample coefficient of skewness is 1.149, comment

briefly on its comparison with the coefficient of skewness of the
distribution.
[4]
(iv)
12
(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]
In an experiment to compare the effects of vaccines of differing strengths intended to

give protection to children against a particular condition, twelve batches of vaccine
were tested in twelve equal-sized groups of children. The percentages of children
who subsequently remained healthy after exposure to the condition, named the PRH
values, were recorded. The strength of each batch of vaccine was measured by an
independent test and recorded as the SV value.
CT3 A2006 6
The recorded values are:

Batch:
1
PRH (y): 16
SV (x):
0.9
x 38.4 ;
(i)
2
3
4
68 23 35
1.6 2.3 2.7
528 ;
5
6
7
8
9
42 41 46 48 52
3.0 3.3 3.7 3.8 4.1
x 2 137.16 ;
y2
10 11 12
50 54 53
4.2 4.3 4.5
25, 428 ;
xy 1, 778.4
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 leastsquares linear regression analysis for predicting PRH values from SV
values using all 12 data observations.
(b)
Determine the coefficient of determination R2.
(c)
Determine the equation of the fitted regression line.
(d)
Examine whether or not there is evidence, at the 5% level of testing, to

enable one to conclude that the slope of the underlying regression
equation is non-zero.
[11]
The details of the regression analysis after removing the data for batch 2 are given in
the box below.
Regression equation: y = 3.76 + 11.4 x
Coef
Stdev
t-ratio
p-val
Intercept
x
0.255
0.000
3.757
11.377
Source
df
SS
Regression 1
Error
9
Total
10
(iii)
1486.9
80.8
1567.6
3.092
0.8838
MS
1486.9
8.98
1.22
12.9
p-val
165.69
0.000
(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
EXAMINATION
April 2006
Subject CT3

Core Technical
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
June 2006
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
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
In part (ii)(a), many candidates calculated S yy , S xx , and S xy but did not go on to
calculate the regression and error sums of squares (SSREG, SSRES) as asked for.
In part (iii)(a) many candidates failed to make any of the most pertinent possible
comments (but credit was given for relevant comments other than those given here).
Page 3
April 2006
Examiners Report
n = 40, so the median is the 20.5th observation, which is (7.7+7.8) = 7.75.

This represents 77,500.
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.
Then, using the continuity correction,

P(X > 115) = P(X > 115.5) 1
n 1 S2
2
P S2 1
1 0.5627
4
1
2
3
Page 4
(i)
so here 9S 2 ~
2
n 1
2
9
0.437
115.5 135
=1
74.25
( 2.26) =
2
9
(tables p165)
1
(276.7 254.6 296.3) 275.87
3
276.7 275.87 0.83
254.6 275.87
21.27
296.3 275.87 20.43
SS R
27
15508.6
27
574.4
Let X = number of policies with claims

So X ~ binomial(25, p).
Poisson approximation is X Poisson(25p).
(a)
using Poisson(2.5)
P(X 4) = 0.89118 from tables [or evaluation]
(b)
using Poisson(5)
P(X 4) = 0.44049 again from tables
(2.26) = 0.99.
(ii)
April 2006
Examiners Report
in (a) error is 0.8912 0.9020 = 0.0108

in (b) error is 0.4405 0.4207 = 0.0198
The approximation is valid for small p , and, as p is smaller in (a), this gives
a better approximation as noted with the smaller error.
[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]
Solving P(Z < z) = 0.5714 z = 0.180

Solving P(Z < z) = 0.8238 z = 0.930
t = 201.80 202.73 = 40911
Solving P(Z < z) = 0.3192 z = 0.470
Solving P(Z < z) = 0.6844 z = 0.480
t = 195.3 195.78 = 38236
(i)
L( )
1
2
x = 200 + 10(0.180) = 201.80

y = 201.80 + 0.930 = 202.73
x = 200 + 10( 0.470) = 195.3
y = 195.3 + 0.480 = 195.78
for
< xi < , i = 1, 2,
, n and L( ) = 0 otherwise
So, as increases from zero, L( ) is zero until it reaches the largest

observation in absolute value i.e. max |xi|, i = 1, 2, , n. For the data given,
this value is 0.92.
It is then a decreasing function . Hence the graph is as below:
L(theta)
0
0
(ii)
0.92
The maximum value of L( ) is attained at the largest absolute value of the

data. The ML estimate of is 0.92.
Page 5
(i)
April 2006
Examiners Report
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,

S = Xi is the sum of the amounts.
, Xn be the claim amounts then
E[S] = E[N]E[X]
Here E[N] = 1(0.35946) + 2(0.14379) + 3(0.04742) = 0.7893
and E[X] = 2/1 = 2 from gamma(2,1)
So E[S] = (0.7893)(2) = 1.5786 = 157.86
(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:
0.6528, 0.2611 and 0.0861
E[N] = 1(0.6528) + 2(0.2611) + 3(0.0861) = 1.4333
So E[S] = (1.4333)(2) = 2.8666 = 286.66
(i)
MS(t) = E[etS] = E[E[etS|N]]

Now E[etS|N = n] = E[exp(tX1 +
+ tXn)] = E[exp(tXi)] = {MX(t)}n
MS(t) = E[{MX(t)}N] = E[exp{NlogMX(t)}] = MN{logMX(t)}
= exp[ MX(t) 1}] since N ~ Poisson( )
CS(t) = logMS(t) = MX(t) 1}
(ii)
V[S] = CS (0) =
MX (0)} = E[X2] = 20(10 + 202) = 8200
OR V[S] = E[N]V[X] + V[N]{E[X]}2 = 20 10 + 20 202 = 8200
Page 6
10
(i)
(a)
April 2006
Examiners Report
The key feature of the histogram is that the areas of the four rectangles
should be proportional to the frequencies.
See histogram below.
(b)
Mean is calculated from the following frequency distribution:

5
22
x
f
f = 220,
(ii)
17.5
76
fx = 7852.5
Estimated proportion is p
220
650
37.5
73
7852.5
220
0.338
75
49
35.7%
(or 33.8%)
95% confidence interval for underlying proportion is

p 1.96
p (1 p )
650
0.338 1.96
0.338(0.662)
650
as a percentage: 33.8%
0.338 0.036
3.6% or (30.2%, 37.4%)
Page 7
(iii)
Examiners Report
Under the null hypothesis of no association between percentage in type of trust

and satisfaction with current return, expected frequencies are
2.0
10.0
9.0
1.0
22
6.9
34.5
31.1
3.5
76
6.6
33.2
29.9
3.3
73
six are less than 5 which would invalidate a

(iv)
April 2006
4.5
22.3
20.0
2.2
49
2
20
100
90
10
220
test
expected frequencies (e) are

12.000
10.000
41.455
34.545
39.818
33.182
26.727
22.273
6.455
+6.455
+3.182
3.182
+6.273
6.273
1.005
1.206
0.254
0.305
1.472
1.767
table of residuals (o e) is
3.000
+3.000
table of contributions to
is
0.750
0.900
giving
= 7.659 on 3 d.f.
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
11
(i)
= E[X 2 ]
[E(X)]2 = 12
= E[X 3] 3 E[X2] + 2
3
= 60
(3 )2 = 3
April 2006
Examiners Report
3(3 )(12 2) + 2(3 )3
= (60
108 + 54)
=6
coefficient of skewness =
3
3
1.155
2 3
( 3
[OR: note that X ~ gamma(3,1/ ) and use formulae in tables

2
so var = 3 2 and coef. of skew. =
]
3
n
(ii)
L( )
i 1
xi2
2
exp(
3
xi
xi2
n 3n
log L( ) log( xi2 ) n log 2 3n log
xi
xi
3n
log L( )
xi
exp
equate to zero:
xi
3n
xi
3n
this clearly maximises L( )

Xi
3n
So MLE is
(iii)
1
E X
3
(a)
(b)
s2
2
log L( ) ]
X
3
1
E X
3
313.6
50
[or consider
6.272
1
3
3
unbiased
6.272
3
2.091
1
313.62
(2675.68
) 14.465
49
50
3
and 3
13.117
s2 is a bit larger but still quite close
Page 9
(iv)
April 2006
Examiners Report
(c)
sample coefficient 1.149 is very close to the distribution value 1.155
(a)
s2
is x 1.96
n
approximate 95% CI for

as
= 3 , divide by 3 for an approximate 95% CI for
1
s2
x 1.96
3
n
for data:
1
14.465
6.272 1.96
3
50
2.091 0.351
(b)
=3
or
(1.740, 2.442)
= 9.083 at lower limit of 1.740

= 17.890 at upper limit of 2.442
s2 = 14.465 is well within these values

confirming that s 2 is quite close to 3 2 .
12
(i)
70
60
PRH
50
40
30
20
SV
(ii)
Page 10
(a)
SSTOT = Syy = 25428
5282/12 = 2196
Sxx = 137.16 38.42/12 = 14.28 , Sxy = 1778.4
(38.4 528)/12 = 88.8
SSREG = 88.82/14.28 = 552.20, SSRES = 2196
552.20 = 1643.80
(b)
R2 = 552.2/2196 = 0.251 (25.1%)
(c)
y = a + bx:
April 2006
b 88.8 /14.28 6.2185

a 528 /12 88.8 /14.28 (38.4 /12)
Examiners Report
24.101
Fitted line is y = 24.101 + 6.2185x

(d)
s.e. b
1643.8 /10
14.28
1/ 2
3.3928
Observed t = (6.2185 0)/3.3928 = 1.833 < t10(0.025) = 2.228

so we do not have evidence at the 5% level of testing to justify
rejecting b = 0 and concluding that the underlying slope is non-zero.
(iii)
(a)
Large change in slope (and intercept) of fitted line.

The total and error sums of squares are much reduced.
The fit of the linear regression model is much improved (R2 is much
increased from 25.1% to 94.9%).
We have overwhelming evidence to justify concluding that the slope is
non-zero.
(b)
Fitted PRH value at SV = 3.5 is 3.757 + (11.377 3.5) = 43.577
n 11,
x 38.4 1.6 36.8,
x 2 137.16 1.62 134.6
Sxx = 11.4873
s.e. of estimation =
1
11
3.5 36.8 /11

11.4873
1/ 2
8.98
0.9138
t9(0.025) = 2.262
95% CI for expected PRH is 43.577
i.e. 43.577
2.067
(2.262
0.9138)
or (41.51, 45.64)
Page 11
EXAMINATION
Subject CT3

Core Technical
1.
booklet.
2.
supervisor.
3.
4.
5.

question paper.
CT3 S2006
A bag contains 8 black and 6 white balls. Two balls are drawn out at random, one
after the other and without replacement.
Calculate the probabilities that:
(i)
The second ball drawn out is black.
(ii)
The first ball drawn out was white, given that the second ball drawn out is
black.
[2]
[Total 3]
Let A and B denote independent events.

Show that A and B , the complement of event B, are also independent events.
[1]
[3]
Consider 12 independent insurance policies, numbered 1, 2, 3, , 12, for each of

which a maximum of 1 claim can occur. For each policy, the probability of a claim
occurring is 0.1.
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]
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]
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 .
Test the hypotheses
H0:
0.4 v H1:
< 0.4
stating clearly the approximate probability value of the observed statistic and your
conclusion.
[4]
CT3 S2006
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]
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
15
so
E[Xi] = 15, Var[Xi] = 152 = 225.

(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]
CT3 S2006
PLEASE TURN OVER
Let X1 denote the mean of a random sample of size n from a normal population with
mean
2
1,
and variance
and let X 2 denote the mean of a random sample also of
size n from a normal population with the same mean

two samples are independent.
but with variance
2
2.
The
Define W as the weighted average of the sample means
X1 (1
)X2
(i)
Show that W is an unbiased estimator of .
[1]
(ii)
Obtain an expression for the mean square error of W.
[2]
(iii)
Show that the value of

given by
2
2
2
1
2
2
for which W has minimum mean square error is
and verify that the optimum corresponds to a minimum.
[3]
(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]
(i)
Show that for continuous random variables X and Y:

E[Y] = E[E(Y|X)].
(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.
Determine E[Y] and Var[Y].
CT3 S2006
[3]
[5]
[Total 8]
10
Let (X1, X2,
, Xn) be a random sample of a gamma(4.5, ) random variable, with
sample mean X .
(i)
(ii)
2
9n .
(a)
Using moment generating functions, show that 2 nX ~
(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]
(a)
Show that the maximum likelihood estimator of
is given by
4.5
.
X
(b)
Show that the asymptotic standard error of
4.5n
(c)
1/ 2
is estimated by
Construct a 95% confidence interval for based on the asymptotic

distribution of , and evaluate this interval in the case for which a
random sample of 100 observations gave a value
xi 225.3.
[9]
[Total 18]
CT3 S2006
PLEASE TURN OVER
11
A survey of financial institutions which offered tax-efficient savings accounts was

conducted. These accounts had limits on the amounts of money that could be
invested each year. The study was interested in comparing the maturity values
achieved by investing the maximum possible amount each year over a certain time
period.
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
( x1 = 93.20, x12 = 1,086.0470)
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
( x2 = 141.78, x22 = 1,675.8224)
(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
( x3 = 143.83, x32 = 1,724.2449)
(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
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.
Speed of vehicle (x):
Stopping distance (y):
x = 280
(i)
y = 241
10
5
20
10
x 2 = 14,000
30
23
40
34
50
40
y 2 = 11,951
60
54
70
75
xy = 12,790
Construct a scatterplot of the data, and comment on whether a linear

regression is appropriate to model the relationship between the stopping
distance and speed.
[4]
(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.
Comment briefly on the reliability of these estimates.
END OF PAPER
CT3 S2006
[4]
[Total 18]
EXAMINATION
September 2006
Subject CT3 Probability and Mathematical Statistics

Core Technical
EXAMINERS REPORT
Introduction
M A Stocker
November 2006
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 = 0.34 (wrongly) rather than = 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
sample of size n, namely Var X =
2
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
Var[Y] = Var[E(Y|X)] + E[Var(Y|X)]
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 ( ) is the log-likelihood.
d
Page 2
Question 11
s12
s22
(which is the reciprocal
In the part on equality of variances (part (iii)(a)) some candidates who worked with
(= 0.607) did not know how to find the lower 2.5% point of F7,11
of the upper 2.5% point of F11,7 , and is approximately
1/4.71 = 0.212).
Page 3
(i)
P(second ball drawn is B) = P(first ball drawn is B) = 8/14 = 0.571

OR P(1st B and 2nd B) + P(1st W and 2nd B)
= (8/14)(7/13) + (6/14)(8/13) = 8/14
(ii)
P(1st W | 2nd B) = P(1st W and 2nd B)/P(2nd B) = (6/14)(8/13)/(8/14)

= 6/13 = 0.462
Since A and B are independent, P ( A ) = P ( A | B ) = P ( A | B )
Noting that ( B ) = B , it follows immediately that P ( A ) = P ( A | B ) = P A | ( B )
and so A and B are independent.

[OR
Since A and B are independent P (A B) = P(A)P(B).
Thus,
P(A B ) = P(A) P(A B) = P(A) P(A)P(B) = P(A){1 P(B)} = P(A)P( B )
A and B are independent.
P(no claims on 6 policies) = 0.5314 (from tables p186 or using 0.96)

P(1 claim on 6 policies) = 0.8857 0.5314 = 0.3543 (or using 6(0.1)(0.95))
So required probability = 0.5314 0.3543 = 0.188.
Let X be the number in force for more than five years

then X ~ binomial(500,0.65)
Using a normal approximation, X N(325, 10.6652)
P(X < 300) becomes P(X < 299.5) using continuity correction
P( Z <
299.5 325
) where Z ~ N(0,1)
10.665
= P ( Z < 2.39) = 1 0.99158 = 0.0084
Page 4
Under H0: sample proportion P is approximately normally distributed with mean 0.4
and standard error (0.40.6/200)1/2 = 0.03464
P-value of observed proportion (68/200 = 0.34)
0.34 0.4
= PZ <
= P ( Z < 1.732 ) = 0.042
0.03464
We reject H0 at the 5% level of testing and conclude that the proportion of

policyholders who are female is less than 0.4.
[OR This is actually better - working with the number of female policyholders
(observed = 68), the P-value is
68.5 80
PZ <
= 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
(i)
P(no claims) = P(X = 0) where X ~ Poisson(0.5)

= 0.60653 from tables [or evaluation]
(ii)
Let Y = number of years with a claim

then Y ~ binomial(3,0.3935) [or just directly as below]
P(Y = 1) = 3(0.3935)(0.6065)2 = 0.434
(iii)
Let T = time until next claim

then T ~ exp(0.5)
P(T > 2) = e0.5(2) [or by integration]
= e1 = 0.368
[OR: answer = {P(no claim)}2 = 0.606532 = 0.368]
[OR: claim rate for period of 2 years = 1, so P(no claim in 2 years)
= e-1 = 0.368]
(i)
As stated in the question, if Xi is the waiting time on day i, then Xi has an

exponential distribution with parameter
1
15
so E(Xi) = 15, Var(Xi) = 152 = 225.
If X is the total waiting time over the 100 days, X = i =1 X i ,

100
Page 5
so E[X] = 1500 and Var[X] = 22500 and by the CLT

X has approximately an N(1500, 22500) distribution,
1620 1500
so P(X > 1620) 1
= 1 (0.8) = 0.2119.
150
(ii)
If Yj is the waiting time on day j of the extra 99 days, then E(Yj) = 10 and
Var(Yj) = 100 so that if Y =
j =1Y j
99
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
= 1 (0.5) = (0.5) = 0.6915.
180
(i)
E (W ) = E (X1 + (1 ) X 2 )
= E ( X1 ) + (1 ) E ( X 2 ) = + (1 ) =
Therefore W is unbiased.
(ii)
MSE(W) = var(W) + {bias(W)}2

W is unbiased
MSE(W) = var(W)
= var(X1 + (1 ) X 2 )
= 2 var( X1 ) + (1 ) 2 var( X 2 ) (independent samples)
= 2
(iii)
12
2
+ (1 ) 2 2
n
n
2
2
dMSE
= 2 1 2(1 ) 2
d
n
n
dMSE
= 0 (12 + 22 ) = 22
d
Page 6
22
12 + 22
d 2 MSE
d 2
(iv)
=2
12
2
+ 2 2 > 0 minimum
n
n
The maximum likelihood estimator of in the special case with

12 = 22 = 2 is
=
nX + nX 2
sum of observations
= 1
number of observations
2n
1
1
X1 + X 2
2
2
This is the same as W since

=
(i)
22
12
+ 22
2
2
1
1
1
W = X1 + X 2 .
2
2
2
E[E(Y|X)] = E[Y|X = x] f(x)dx

= yf(y|x)dy f(x)dx
= y f(y|x) f(x)dydx
but f(y|x) f(x) = f(x,y), the joint pdf of X and Y, so

E[E(Y|X)] = y f(x,y)dxdy = E[Y]
(ii)
E[Y]
= E[E(Y|X)] = E[X2 + 1]
= V[X] + {E[X]}2 + 1 = 1 + 0 + 1 = 2
Var[Y]
= Var[E(Y|X)] + E[Var(Y|X)] = Var[X2 + 1] + E[X2 + 1]

= Var[X2] + E[X2] + 1
but Z = X2 is 12 so has variance 2 and expectation 1

Thus Var[Y] = 2 + 1 + 1 = 4
Page 7
10
(i)
(a)
Mgf of Xi is (1 t/)4.5 so mgf of

n
(1 t / )
4.5
= (1 t / )
Xi
is
i =1
4.5n
i =1
Hence mgf of 2 X i = 2nX is (1 2t / )
4.5n
= (1 2t )
4.5 n
i =1
This is the mgf of a 2 variable with 9n degrees of freedom.

(b)
b
a
<<
P ( a < 2nX < b ) = 0.95 P
= 0.95
2nX
2nX
where a and b are such that
P 92n < a = 0.025 and P 92n > b = 0.025.
b
a
so a 95% CI for is given by
,
2nX 2nX
(c)
9n = 90, and from tables of 2 with 90df we have a = 65.65, b = 118.1

118.1
65.65
CI is
,
= (1.53 , 2.75).
2 21.47 2 21.47
(ii)
(a)
L ( ) 4.5n exp xi
so
A ( ) = ( 4.5n ) log xi + constant
dA
= 4.5n / xi
d
d 2A
Setting
= 4.5n / 2 so s.e.( )
(b)
(c)
95% CI is 1.96 s.e.
( 4.5n )1/ 2
( )}
In the case n = 100, x = 225.3,
Page 8
4.5n 4.5
dA
=
= 0 =
d
Xi X
4.5 / 2.253
= 4.5 / 2.253 = 1.9973 and s.e.( )
= 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
11.4
(ii)
11.5
11.6
11.7
11.8
11.9
12.0
12.1
12.2
x1: maturity value for high street bank

x2: maturity value for other bank
x1 =
93.20
= 11.650
8
x2 =
141.78
= 11.815
12
1
93.202
s12 = 1086.0470
= 0.038143
7
8
s22 =
1
141.782
1675.8224
= 0.062882
11
12
Pooled estimate of :
s 2p
(n1 1) s12 + (n2 1) s22 7(0.038143) + 11(0.062882)

=
=
= 0.053261
n1 + n2 2
18
s p = 0.2308
95% confidence interval for 1 2 is

11.650 11.815 t18 (2%) s p
= 0.165 (2.101)(0.2308)
1 1
+
8 12
1 1
+
8 12
Page 9
i.e. 0.165 0.2213

i.e. (0.386, 0.056)
i.e. the confidence interval for the difference between the means for high street
banks and other banks (1 2) is 386 to 56.
As zero is within the confidence interval, there is insufficient evidence, at 5%
level, to reject the null hypothesis that the mean maturity values do not differ
for the accounts offered by high street banks and other banks.
(iii)
(a)
S 22
S12
~ F11,7
under the assumption that the variances are equal for high street and
other banks,
i.e. H0: 12 = 22
s22
s12
0.062882
= 1.65
0.038143
We cannot reject the null hypothesis at the 5% level as the two-sided

critical value of a 5% level test is approximately 4.71 (by interpolation
using 2% one-sided F table in Yellow Book).
[OR probability value is p > 0.20 as a two-sided 20% level test has a
critical value of approximately 2.69.]
(b)
(iv)
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).
Adding points for building societies to previous plot in (i).

Maturity values
High street
Other banks
Building soc
11.4
Page 10
11.9
12.4
(v)
x = 93.20 + 141.78 + 143.83 = 378.81

x2 = 1086.0470 + 1675.8224 + 1724.2449 = 4486.114
SST = 4486.114
378.812
= 1.832
32
93.202 141.782 143.832 378.812

+
+
= 0.551
8
12
12
32
SSR = SST SSB = 1.832 0.551 = 1.281
SSB =
Analysis of variance table

Source of variation
Financial institution types
Residual
Total
F=
df
2
29
31
SS
0.551
1.281
1.832
MSS
0.276
0.044
0.276
= 6.27 on (2, 29) degrees of freedom
0.044
F2,29 (5%) = 3.328 and F2,29 (1%) = 5.42

Reject H0: 1 = 2 = 3 (population means are equal) at 1% level.
Strong evidence of differences between the 3 financial institutions.
The plot shows nothing strong enough to invalidate the assumptions of
normality and equal variances, even though the variability for the building
societies is a bit smaller than for the banks.
(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
12
(i)
Plot of stopping distance against speed

80
Stopping distance
70
60
50
40
30
20
10
0
10
20
30
40
50
60
70
Speed
There is a suggestion of a curve but linear regression might still be reasonable.

(ii)
n=7
Sxx = x2 (x)2/n = 14000 (280)2/7 = 2800
Syy = y2 (y)2/n = 11951 (241)2/7 = 3653.714
Sxy = xy (x)( y)/n = 12790 (280)(241)/7 = 3150
Model: E[Y] = + x
Slope: =
S xy
S xx
3150
= 1.125
2800
Intercept: = y x = 241/7 (1.125)(280/7) = 10.571

The equation of the least-squares fitted regression line is:
Distance = 10.571 + 1.125 Speed
Page 12
(iii)
2 =
S2
1
S yy xy
n2
S xx
s.e.( ) =
2
=
S xx
1
(3150) 2
= 3653.714
= 21.99
5
2800
21.99
= 0.0886
2800
95% confidence interval for slope:

tn 2 (0.025) s.e.( )
(df = n 2 = 5)
= 1.125 (2.571)(0.0886) = 1.125 0.228 or (0.897, 1.353)

= 1 is within this 95% confidence interval, therefore we would not reject the
null hypothesis = 1 at the 5% significance level.
(iv)
When x = 50: y = 10.571 + 1.125(50) = 45.7 m

When x = 100: y = 10.571 + 1.125(100) = 101.9 m
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
EXAMINATION
23 April 2007 (am)

Core Technical
1.
booklet.
2.
supervisor.
3.
4.
5.

question paper.
CT3 A2007
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]
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]
It is assumed that claims on a certain type of policy arise as a Poisson process with
claim rate 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]
The sample correlation coefficient for the set of data consisting of the three pairs of
values
(1,2) , (0,0) , (1,1)
is 0.982. After the x and y values have been transformed by particular linear functions,
the data become:
(2,2) , (6,4) , (10,7).
State (or calculate) the correlation coefficient for the transformed data.
CT3 A20072
[2]
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.
The current financial year has six months remaining.
Calculate the mean and the standard deviation of the total claim amount which arises
during this remaining six months.
[4]
Consider the discrete random variable X with probability function

f ( x) =
(i)
4
5 x +1
x = 0, 1, 2, ...
Show that the moment generating function of the distribution of X is given by

M X (t ) = 4(5 et ) 1 ,
for et < 5.
(ii)
[3]
Determine E[X] using the moment generating function given in part (i).
[3]
[Total 6]
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]
Consider a person who purchases 200 of these certificates.

(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]
(iii)
An alternative approach to approximating the probability in (ii) above is based

on the number of prize certificates the person is found to hold. This number
will follow a binomial distribution.
Use a Poisson approximation to this binomial distribution to approximate the
probability that this person is repaid more than 2,040.
[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]
CT3 A20073
PLEASE TURN OVER
A random sample of size n is taken from a distribution with probability density

function
f ( x) =
(1 + x)+1
0< x<
where is a parameter such that > 0.

(i)
Show by evaluating the appropriate integral that, in the case > 1, the mean
1
.
of this distribution is given by
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.]
(ii)
10
Determine the method of moments estimator of .
[3]
[2]
[Total 5]
Consider three random variables X, Y, and Z with the same variance 2 = 4. Suppose
that X is independent of both Y and Z, but Y and Z are correlated, with correlation
coefficient YZ = 0.5.
(i)
Calculate the covariance between X and U, where U = Y+Z.
[1]
(ii)
Calculate the covariance between Z and V, where V = 3X 2Y.
[2]
(iii)
Calculate the variance of W, where W = 3X 2Y + Z.
[2]
[Total 5]
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
1
2
3
4
For these data,
CT3 A20074
Total
58.2
56.3
50.1
52.9
57.2
54.5
54.2
49.9
58.4
57.0
55.5
50.0
55.8
55.3
51.7
54.9
284.5
223.1
159.8
204.5
i j yij = 871.9 and i j yij2 = 47, 633.53
Consider the ANOVA model Yij = + i + 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,
eij ~ N (0, 2 ) are independent errors, and
11
i=1 ni i = 0 .
4
(i)
Calculate estimates of the parameters and i , i = 1, 2, 3, 4 .
(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]
[3]
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 . 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
Suppose that it is required to estimate , the mean number of claims on a policy.
(i)
Show that , the maximum likelihood estimator of , is given by = X . [3]
(ii)
Derive the Cramer-Rao lower bound (CRlb) for the variance of unbiased
estimators of .
(iii)
[4]
(a)
Show that is unbiased for and that it attains the CRlb.
(b)
Explain clearly why, in the case that n is large, the distribution of can
be approximated by

~ N , .
n
[3]
(iv)
(a)
Show that, in the case n = 100, an approximate 95% confidence

interval for is given by
x 0.196 x .
(b)
Evaluate the confidence interval in (iv)(a) based on a sample with the

following composition:
observation
frequency
0
11
1
28
2
19
3
28
4
9
5
2
6
2
7
1
[6]
[Total 16]
CT3 A20075
PLEASE TURN OVER
12
An insurance company is investigating past data for two household claims assessors,
A and B, used by the company. In particular claims resulting from similar types of
water damage were extracted. The following table shows the assessors initial
estimates of the cost (in units of 100) of meeting each claim.
A:
B:
4.6
5.7
6.6
3.4
2.8
4.7
5.8
3.6
2.1
6.5
5.2
3.3
5.9
3.8
3.4
2.4
7.8
7.0
3.5
4.0
1.6
4.4
8.6
2.7
for the A data: nA = 13, x = 60.6 and x2 = 340.92

for the B data: nB = 11, x = 48.8 and x2 = 236.80
(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.
(a)
State your hypotheses clearly.
(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.

[10]
(iii)
You are required to perform an appropriate test to compare the variances of

the assessors initial estimates.
(a)
State your hypotheses clearly.
(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 A20076
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
For these data:
x = 1, 200 , x2 = 196,800 , y = 37.65 , y 2 = 213.4875 , xy = 6,378

(i)
Construct a scatterplot of the data and comment on the relationship between

the increase in bus use and the number of maps distributed.
[4]
(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 ( y )
Residuals (e)
1.66 7.75 4.27 3.40 6.01 2.53 6.88 5.14

-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 A20077
EXAMINATION
April 2007

Core Technical
EXAMINERS REPORT
Introduction
M A Stocker
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.
Subject CT3 (Probability and Mathematical Statistics Core Technical) April 2007 Examiners Report
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.
Approximate large sample confidence interval for the mean is given by

s
n
x z / 2
for 99% CI, z / 2 = 2.5758

leading to 43.6 2.5758
or
(28.6, 58.6)
or
82.2
200
43.6 15.0
(28,600, 58,600)
The mean number of claims per policy is X =
123
= 0.82
150
Using the normal approximation to the Poisson distribution

approximate 95% confidence interval for is X 1.96
0.82 1.96
0.82
150
X
n
0.82 1.96(0.0739)
0.82 0.145 or (0.675, 0.965)
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
Let N = number of claims in the six months

Let X = a single claim size
Let S = sum of claim sizes for the six months
Then N ~ Poisson(6)
E ( S ) = E ( N ) E ( X ) = (6)(80) = 480
V ( S ) = E ( N )V ( X ) + V ( N )[ E ( X )]2 = (6)(802 ) + (6)(802 ) = 76800
sd ( S ) = 277
(i)
M X (t ) = E[etx ]
41
4
= e
=

55
5 x =0
x =0
x
tx
et
and for et < 5 ,

M X (t ) =
(ii)
4 1
5 1 et
= 4 5 et
M '(t ) = 4et 5 et
Mean is given by E ( X ) = M '(0)
E[ X ] = 4e0 5 e0
1
.
4
[OR, by expansion as a power series.]
Page 3
(i)
Let X = the sum repaid for a single certificate.
E ( X ) = 10(0.99) + 20(0.01) = 10.1

E ( X 2 ) = 102 (0.99) + 202 (0.01) = 103
V ( X ) = 103 10.12 = 0.99 sd ( X ) = 0.9950
(ii)
Let S = the sum repaid for 200 certificates.

E ( S ) = 200(10.1) = 2020, V ( S ) = 200(0.99) = 198 sd ( X ) = 14.07
P ( S > 2040) = P( Z >
2040 2020
= 1.42)
14.07
= 1 0.9222 = 0.0778
(iii)
N ~ binomial(200, 0.01) Poisson(2)
P ( S > 2040) = P( N > 4)

= 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
(Either approach is acceptable for the marks.)
Page 4
(i)
Mean =
x (1 + x)+1 dx
0
(1 + x)
0
(1 + x)
dx 1
+1
0
(1 + x)+1
dx
( 1)
dx 1
1 (1 + x)(1)+1
0
(ii)
1
1 =
1
1
Equate population mean to sample mean:
Solve to get = 1 +
(i)
1
=x
1
1
1
, so MME = 1 +
x
X
Cov(X,Y+Z) = Cov(X,Y) + Cov(X,Z) = 0

[Note: The simple statement of the answer 0 is acceptable for the single
mark available.]
(ii)
Cov(Z, 3X - 2Y) = 3Cov(Z,X) 2Cov(Z,Y) = 0 2YZ 2

= -2 0.5 4 = -4
(iii)
V[3X 2Y + Z] = (9 + 4 + 1)2 12Cov(X,Y) + 6Cov(X,Z) 4Cov(Y,Z)

= 14(4) 4(0.5)(4) = 48
Page 5
(i)
10
(ii)
= Y.. =
1 = Y1. Y.. =
284.5 871.9
= 2.406
5
16
2 = Y2. Y.. =
223.1 871.9
= 1.281
4
16
3 = Y3. Y.. =
159.8 871.9
= 1.227
3
16
4 = Y4. Y.. =
204.5 871.9
= 3.369
4
16
SST = yij2
i
SSB =
871.9
= 54.494
16
Y..2
= 120.430
n
ni (Yi. Y.. )2 = (5 2.4062 ) + (4 1.2812 ) + (3 1.2272 ) + (4 3.3692 ) = 85.425

i
Y2 Y2
[OR : SS B = i. .. = 85.428]
n
i ni
SS R = SST SS B = 35.002
The ANOVA table is:
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
At the 5% significance level, F0.05,3,12 = 3.490 (or F0.01,3,12 = 5.953 )
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
11
(i)
L( x) =
( ) = log L ( ) = n + ( xi ) log + constant
(ii)
e n xi
xi !
d
xi = 0 =
= n +
d2
d 2
Xi = X
n
xi
2
d2 1
n n
E 2 = 2 E X i = 2 =
d
CRlb =
(iii)
(a)
.
n
E = E X = E [ X ] =
V = V X =
(iv)
V [X ]
n
,which is CRlb.
n
(b)
The theory of asymptotic distributions of MLEs (and in this case the

CLT) gives ~ N approximately, for large n so ~ N , ,
n
approximately.
(a)
Large sample approximate 95% CI for is given by
( ))
1.96 s.e.
i.e. x (1.96 s.e. ( x ) )
()
s.e. =
which we can estimate by using x to estimate , giving
n
()
the estimated standard error e.s.e. =
x
n
With n = 100, we get the 95% CI as
x
x 1.96
i.e. x 0.196 x .
100
Page 7
(b)
x = 215 /100 = 2.15
CI is 2.15 0.196(2.15)1/2 i.e. 2.15 0.287 i.e. (1.86, 2.44)
12
(i)
dotplots on same scale are most suitable

[alternatively boxplots are acceptable]
(ii)
(a)
Let A = mean initial estimate for this type of water damage for
assessor A and B = mean initial estimate for this type of water damage
for assessor B.
H0 : A = B v H1 : A B
(b)
dotplots show that normality assumption is reasonably valid

dotplots perhaps cast doubt on equal variances assumption
(c)
test statistic is t =
From data: x A =
60.6
1
60.62
) = 4.8692
= 4.662 , s 2A = (340.92
13
12
13
xB =
48.8
1
48.82
) = 2.0305
= 4.436 , sB2 = (236.80
11
10
11
s 2p =
12(4.8692) + 10(2.0305)
= 3.5789 s p = 1.8918
22
and
observed t =
Page 8
x A xB
tnA + nB 2 under H0
1
1
sp
+
n A nB
4.662 4.436
0.226
=
= 0.29 on 22 df
0.775
1 1
1.8918
+
13 11
Clearly P-value is very large, or noting that t22(40%) = 0.2564, then

P-value is just a bit less than 0.8.
(iii)
(d)
So there is no evidence at all of any difference between assessors A

and B as regards their mean initial estimates for this type of water
damage.
(a)
H0 : 2A = 2B v H1 : 2A 2B
(b)
as in (i) dotplots show that normality assumption is reasonably valid
(c)
test statistic is F =
observed F =
s 2A
sB2
Fn A 1,nB 1 under H0
4.8692
= 2.40 on 12,10 df
2.0305
F12,10(10%) = 2.284 and F12,10(5%) = 2.913

Thus P-value is between 0.10 and 0.20.
(d)
So there is no real evidence of any difference between assessors A and

B as regards the variances of their initial estimates for this type of
water damage.
This validates the possibly doubtful assumption required in part (ii).
(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
(i)
The scatterplot is shown below.
4
1
trips
13
80
100
120
140
160
180
200
220
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).
(ii)
Sxx = x2 (x)2/n = 196800 (1200)2/8 = 16800

Syy = y2 (y)2/n = 213.4875 (37.65)2/8 = 36.29719
Sxy = xy (x)( y)/n = 6378 (1200)(37.65)/8 = 730.5
2
S xy2 1
1
= 36.29719 (730.5) = 0.75558
=
S yy
n 2
S xx 6
16800
2
s.e.( ) =
0.75558
2
=
= 0.006706
16800
S xx
To test H 0 : = 0 v H1 : 0 , the test statistic is

0.04348
0
=
= 6.484 ,
s.e.( ) 0.006706
and under the assumption that the errors of the regression are i.i.d. N (0, 2 )
random variables, it has a t distribution with n - 2 = 6 df.
Page 10
From statistical tables we find t6,0.025 = 2.447 (or, t6,0.005 = 3.707 ).

Therefore, there is strong evidence against H 0 . We conclude that a straight
line representation of the relationship between the increase in bus use and the
number of maps distributed would have a non-zero slope.
The plot is shown below.
0.0
-1.0
-0.5
Residuals
0.5
1.0
(iii)
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.
(iv)
Predicted value is y = 1.816 + 0.04348 250 = 9.054

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
EXAMINATION
4 October 2007 (am)

Core Technical
1.
booklet.
2.
supervisor.
3.
4.
5.

question paper.
CT3 S2007
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
25
120.2
58.1
n
x
s
Region 2
18
142.7
62.2
Calculate, to one decimal place, the mean and sample standard deviation of the claim
amounts for both regions combined.
[4]
The random variable X has probability density function

f ( x) =
2
x3
x >1
and cumulative distribution function
0,
F ( x) =
1
1 2 ,
x
x <1
x 1
Use the following uniform(0,1) random numbers

0.5719, 0.8612, 0.3028
to simulate three observations of X, explaining your method and calculations clearly.
[4]
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]
In a random sample of 200 policies from a companys private motor business, there
are 68 female policyholders and 132 male policyholders.
Calculate an approximate 99% confidence interval for the proportion of policyholders
who are female in the corresponding population of all policyholders.
[3]
CT3 S20072
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
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 experts

assessment that the average claim amount for the company is 6,500.
[1]
[Total 4]
In an investigation into the relationship between two normally distributed variables, X

and Y, based on a sample of 15 points, it is desired to perform the following test
concerning the true underlying correlation coefficient
H0 : = 0 v H1 : > 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]
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 Xis 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]
Claim sizes in a certain insurance situation are modelled by a normal distribution with
mean = 30,000 and standard deviation = 4,000 The insurer defines a claim to
be a large claim if the claim size exceeds 35,000.
(i)
Calculate the probabilities that the size of a claim exceeds

(a)
(b)
35,000, and
36,000
[2]
(ii)
(iii)
Calculate the probability that the size of a large claim (as defined by the
insurer) exceeds 36,000.
[2]
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]
CT3 S20073
PLEASE TURN OVER
10
For a certain class of policies issued by a large insurance company it is believed that
the probability of each policy giving rise to any claims is 0.5, independently of all
other policies. A random sample of 250 such policies is selected.
(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]
A chi-square test of association for the frequency data in the following 2 3 table
Factor B
B1
B2
Factor A
A1
A2
A3
40
30
50
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 B
B1
B2
Factor A
A1
A2
A3
80
60
100
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).
(iii)
Comment on the results.
CT3 S20074
[1]
[2]
[Total 5]
11
Suppose that the random variable X follows an exponential distribution with

probability density function
f ( x) = e x , 0 < x <
Define a new random variable Y =

(i)
(a)
( > 0) .
1
X3.
Show that the cumulative density function of Y is given by

1 exp(y 3 ),
FY ( y ) =
0,
y0
y<0
and hence, or otherwise, find the probability density function of Y.
(ii)
(b)
Explain how you would simulate a value of Y given a value u from the
uniform U(0,1) distribution.
[7]
(a)
Find an expression for the maximum likelihood estimator of the

parameter , using a sample y1, y2, , yn, from the distribution of Y.
(b)
Eight observed values of the random variable Y are given below:

0.72 1.15 1.26 1.03 1.69 1.30 1.42 1.15
Calculate the maximum likelihood estimate of using these values. [6]
(iii)
(a)
The hazard function of a continuous random variable T is defined

f (t )
as h(t ) =
, where f(t) denotes the probability density function and
S (t )
S(t) denotes the survival function defined as S (t ) = P (T > t ) .
Derive the hazard functions of the random variables X and Y defined
above.
(b)
If a random variable T represents the lifetime of an individual, then the

hazard function h(t), as defined in part (iii)(a), gives the instantaneous
mortality rate (that is, the force of mortality) at time t for that
individual.
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]
CT3 S20075
PLEASE TURN OVER
12
A series of n geomagnetic readings are taken from a meter, but the readings are
judged to be approximate and unreliable. The chief scientist involved does know
however that the true values are all positive and she suggests that an appropriate
model for the readings is that they are independent observations of a random variable
which is uniformly distributed on (0, ), where > 1.
(i)
(ii)
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
(b)
n
Demonstrate that the maximum likelihood estimate of is = .
m
(c)
Demonstrate that the Cramer-Rao lower bound (CRlb) for estimating

2 ( 1)
and hence state the large sample distribution of .
is
n
[10]
Suppose that exactly 45 readings in a random sample of 100 readings are less
than 1.
(a)
Calculate an estimate of the standard error of and hence calculate an

approximate two-sided 95% confidence interval for .
(b)
Use the large sample distribution of to test the hypotheses

H0: = 3 v H1: < 3.
[9]
[Total 19]
CT3 S20076
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.
12%
46
51
47
42
14%
56
57
63
60
16%
56
63
60
64
18%
47
51
54
55
These data are analysed by two statisticians, A and B, who use an analysis of variance
approach and a linear regression approach, respectively.
(i)
Statistician As approach:
You are given the following data summaries:
sub-totals y = 186, 236, 243 and 207 at x = 12, 14, 16 and 18,
respectively, and overall totals y = 872 and y2 = 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:
Comment briefly on any implications of this graph.
CT3 S20077
[10]
PLEASE TURN OVER
(ii)
Statistician Bs approach:
You are given the following data summaries:
x = 240 y = 872 x2 = 3,680 y2 = 48,196 xy = 13,150.
(a)
Perform a linear regression analysis on these data to show that the

fitted line is given by y = 41.4 + 0.875x.
(b)
Perform the hypothesis test on the slope coefficient

H0 : = 0 v H1 : 0
showing that the P-value is greater than 0.20.
Comment on what this implies about the relationship between x and y.
(c)
The graph below shows the residuals plotted against the values of x:
Comment briefly on what this graph implies about the effect of x on y.

(d)
Suggest an additional analysis statistician B could now use to describe

the effect of x on y.
[10]
[Total 20]
END OF PAPER
CT3 S20078
EXAMINATION
September 2007

Core Technical
EXAMINERS REPORT
Introduction
M A Stocker
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.
x=
x 25(120.2) + 18(142.7) 5573.6

=
=
= 129.6
n
25 + 18
43
Using the fact that x 2 = (n 1) s 2 + nx 2 , then for the combined set

x 2 = [24(58.1) 2 + 25(120.2) 2 ] + [17(62.2) 2 + 18(142.7) 2 ] = 874525.14
s2 =
874525.14 (5573.6) 2 / 43
= 3621.02 s = 60.2
42
Method: set uniform(0,1) random number r = F(x) = 1 1/x2

simulated observation x = [1/(1 r)]1/2
Here we get x = 1.528 , 2.684, 1.198.
Note: We can do away with the step of subtracting r from 1 and use x = (1/r)1/2.
This gives x = 1.322, 1.078, 1.817.
Let N be the number who have another type of account.

N ~ binomial(250, 0.24) N (60, 45.6) = N (60, 6.7532 )
P ( N < 50) P( N < 49.5) with continuity correction

= P( Z <
49.5 60
= 1.55) = 1 0.93943 = 0.061
6.753
Sample proportion P = 68/200 = 0.34

99% CI is 0.34 2.576
Page 2
0.34 0.66
i.e. 0.34 0.086 i.e. (0.254, 0.426)
200
(i)
56.7
= 7.0875.
8
1
56.7 2
s 2 = 403.95
= 0.298 s = 0.546 .
7
8
x=
90% CI for the true mean is given by:

x t7,0.05
s
0.546
= 7.0875 1.895
= 7.0875 0.3658
n
8
i.e. the 90% CI is (6.722, 7.453), or (6722, 7453).

(ii)
The value 6500 is not included in the CI above, and therefore we conclude
that the data are not consistent with the experts assessment at the 10%
significance level.
Use the result
r n2
1 r2
~ tn2 under H0.
From tables t0.01,13 = 2.650

so critical value is solution of
r
1 r2
13 = 2.65
2.652
13
= 0.592
Solving gives r =
2.652
1+
13
From the Yellow Book:

Mean:
E(S) = E(N)E(X) = (20)(10000) = 200,000
Variance: var(S) = E(N) var(X) + var(N)[E(X)]2

= 20(20002) + 20(100002) = 2080 106
Standard deviation = 45607
[OR, using compound Poisson results (in Yellow Book)
E(S) = m1 and var(S) = m2 where = E(N) and mr = E(X r)]
Page 3
X ~ N with mean = 30 and = 4 (working in units of 1000)

(i)
(a)
(b)
(ii)
35 30
P ( X > 35 ) = P Z >
= P ( Z > 1.25 ) = 1 0.89435 = 0.10565
4
36 30
P ( X > 36 ) = P Z >
= P ( Z > 1.5 ) = 1 0.93319 = 0.06681
4
P(X > 36 | X > 35) = P(X > 36 and X > 35) / P(X > 35)
= P(X > 36) / P(X > 35)
= P(Z > 1.5)/P(Z > 1.25) = 0.06681/0.10565 = 0.632
(iii)
(i)
5
2
3
0.1056 0.8944 = 0.0798
2

If X is the random variable denoting the number of policies giving a claim,

then X ~ binomial(250,0.5).
Using the normal approximation (CLT), X N (125, 62.5) .
Using the appropriate continuity correction we have:
P ( X 139) = P( X > 138.5)
138.5 125
= PZ >
= 1 (1.7076 ) = 0.044 .
62.5
(ii)
This is a one-sided test of H 0 : p = 0.5 v H1 : p > 0.5 .

P-value of the test is 0.044 from part (i).
The evidence against the hypothesis that p = 0.5 (and in favour of
p > 0.5) is not strong enough to justify rejecting it at the 1% level of testing
we cannot conclude p > 0.5.
Page 4
10
(i)
Chi-square statistic is doubled and has value 9.722

OR work it out
(ii)
P-value is given by P 22 > 9.722 = 0.0077

Note: answer = 0.008 is acceptable for the mark
11
(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.
(i)
(a)
Y=X
X = Y 3 , and range of Y is (0, ).
The cdf is given by
FY ( y ) = P (Y y ) = P( X y 3 ) = FX ( y 3 )
1 exp(y 3 ), y 0
FY ( y ) =
y<0
0,
(using formulae or by integration).
Then, the pdf of Y can be derived as
fY ( y ) =
d
FY ( y ) = 3y 2 exp y 3 .
dy
[OR, directly as
fY ( y ) = f X ( x)
3
dx
= e y 3 y 2
dy
fY ( y ) = 3y 2 exp y 3 ,
OR, from formulae, identifying the cdf as that of a Weibull distribution

with c = , = 3. ]
Page 5
(b)
First simulate X ~ exp() as

1
u = 1 ex x = log(1 u ) ,
then set y = x
3.
[OR, use cdf of Y directly, i.e. u = 1 e
y 3
y = log(1 u )

(ii)
n
(a)
L() = f ( yi ; ) = 3yi 2 exp yi 3

i =1
i =1
)} = 3 y
n n
() = log L( ) = n log( ) yi 3 + constant

i
n
( ) = yi 3
i
( ) = 0 =
yi3
i
[Check that ( ) =
(b)
n
2
< 0. ]
For the given data we have
yi3 = 16.3952
i
yi
8
= 0.488 .
16.3952
(iii)
(a)
For X ~ exp() we have

h( x ) =
f ( x)
e x
=
=
S ( x) 1 1 e x
For Y (using pdf and cdf derived above):
(
(
) = 3y
))
3y 2 exp y 3
f ( y)
h( y ) =
=
S ( y ) 1 1 exp y 3
Page 6
exp yi 3
(b)
12
(i)
X has a constant hazard rate h( x) = , and therefore should only be

used when the force of mortality can be assumed constant, e.g. over a
one-year period of time in mortality studies. For longer periods of
lifetime the r.v. Y is more suitable, as it gives an increasing hazard
function with time.
Let X be a reading and M be the number of readings which are less than 1
(a)
Since X ~ U(0, ) , P(X < 1) = length of [0,1]/ length of [0, ] = 1/
(b)
1 1
L ( ) 1

nm
( ) = m log + ( n m ) log
( ) = ( n m ) log ( 1) n log
nm n
=
set to zero = n / m
1
OR Since M ~ bi(n,1/) , MLE of 1/ is the sample proportion of

readings which are <1, namely m/n, so
(1/ ) = m / n
(c)
1/ = m / n = n / m
( n m) n
nm n
2
=
2 =
1
( 1)2 2
nM n nn/ n
2
n
=
2= 2
E 2 = E
2
2
2
( 1)
( 1) ( 1)

CRlb =
(ii)
(a)
2 ( 1)
n
2 ( 1)
Large sample distribution of is N ,
n = 100, m = 45, = 100 / 45 = 2.222

Estimate of standard error of
= [(100/45)2(100/45 1)/100]1/2 = 0.2457
approximate 95% CI for is given by 2.222 1.96 0.2457

i.e. 2.222 0.482 i.e. (1.74, 2.70).
Page 7
(b)
Under H0: N ( 3, 0.18 )

2.222 3
P -value = P < 2.222 = P Z <

= P ( Z < 1.834 )
0.4243
= 0.033 (by interpolation in the table)

We can reject H0 (at levels of testing down to 3.3%) and conclude that
< 3.
[OR note that P(Z < 1.834) is less than 0.05, so reject H0 at 5% level]
13
(i)
(a)
SST = 48196 8722/16 = 48196 47524 = 672

SSB = (1862 + 2362 + 2432 + 2072)/4 47524 = 523.5
SSR = 672 523.5 = 148.5
F=
523.5 / 3 174.5
=
= 14.10
148.5 /12 12.375
[or construct an ANOVA table]

(b)
F3,12(1%) = 5.953 from tables

since 14.10 >> 5.953, P-value << 0.01
(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.
Here is a plot of the individual y values:
Page 8
The shape of the effect seems to be curved, initially increasing, then

decreasing.
(d)
(ii)
(a)
The implications are simply that there is nothing to invalidate the

assumptions required for the analysis.
2402
= 3680
= 80
16
8722
= 48196
= 672
16
S xx
S yy
[or could state it is the same as SST from (i)]
S xy = 13150
(240)(872)
= 70
16
70
=
= 0.875 as required
80
=
(b)
1
(872 0.875(240)) = 41.375 as required.
16
2 =
1
702
(672
) = 43.625
14
80
43.625
= 0.7385
s.e. ( ) =
80
t=
0.875 0
= 1.185 on 14 d.f.
0.7385
P-value = 2 P(t14 >1.185)

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.
[not that there is no relationship]
(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.

Page 9
EXAMINATION
10 April 2008 (am)

Core Technical
1.
booklet.
2.
supervisor.
3.
4.
5.

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.
CT3 A2008
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
Number of policies f
0
64
1
12
2
3
3
0
4
1
For these data fx = 22, fx2 = 40

Calculate the sample mean and standard deviation of the number of claims per policy.
[3]
Data on a sample of 29 claim amounts give a sample mean of 461.5 and a sample
standard deviation of 618.8.
One claim amount of 3,657.50 is identified as an outlier and after investigation is
found to be in error. Calculate the revised sample mean and standard deviation if this
erroneous amount is removed.
[4]
The following sample contains claim amounts () on a particular class of insurance

policies:
1,717
1,614
1,595
1,524
1,764
4,320
1,464
1,626
1,854
1,440
1,560
1,602
1,698
(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]
Consider two events A and B, such that P ( A) = 0.3 and P ( A B ) = 0.1 .

Find the minimum and maximum possible values of the conditional probability
P( A | B) .
CT3 A20082
[4]
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:
G1
G2
G3
G4
Portfolio
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]
Consider two random variables X and Y with joint probability density function (pdf)
f ( x, y ) =
4
(1 xy ) , 0 < x < 1, 0 < y < 1 .
3
The marginal pdf of X is given by

f ( x) =
2
(2 x) , 0 < x < 1
3
with a corresponding marginal pdf for Y by symmetry (you are not asked to verify
these marginal densities).
(i)
Show that the conditional pdf of Y given X = x is given by

f ( y | x) = 2
(ii)
(1 xy )
, 0 < y < 1.
(2 x)
[2]
(a)
Determine the conditional expectation E (Y | X = x) as a function of x

and hence determine E (Y ) .
(b)
Verify your answer in part (a) by determining E (Y ) directly from the

marginal pdf of Y.
[5]
[Total 7]
CT3 A20083
PLEASE TURN OVER
The claim amount X in units of 1,000 for a certain type of industrial policy is
modelled as a gamma variable with parameters = 3 and = .
1
X ~ 62 .
2
(i)
Use moment generating functions to show that
(ii)
Hence use tables to find the probability that a claim amount exceeds 20,000.
[2]
[Total 5]
[3]
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]
10
A researcher wishes to investigate whether a coin is balanced or not, that is if

P (heads) = 0.5 . She throws the coin four times and decides to accept the hypothesis
H 0 : P(heads) = 0.5 in a test against the alternative H1 : P(heads ) 0.5 , if the number
of times that the coin lands heads is 1, 2, or 3.
(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]
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 2 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 A20084
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 , 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 tk .
(b)
Show that the likelihood function of the parameter , using information

from all n policies, is given by
k
L ( ) = k e
ti
i =1
e ( n k ) tk .
Hence find the maximum likelihood estimate (MLE) of .

(c)
Consider an investigation on 20 policies which is terminated when five

policies have expired, giving the following observed expiry times (in
months):
1.03 6.67 12.70 12.88 21.54
Calculate the MLE of based on this sample.
[9]
(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.
(b)
Hence find the MLE of in this case.
(c)
Consider an investigation on 20 policies that is terminated after 24

months. By the time of termination five policies have expired.
Use this information to calculate the MLE of in this case.
[9]
[Total 18]
CT3 A20085
PLEASE TURN OVER
12
The members of the computer games clubs of three neighbouring schools decide to
take part in a light-hearted competition. Each club selects five of its members at
random under a procedure agreed and supervised by the clubs. Each selected student
then plays a particular game at the end of which the score he/she has attained is
displayed and recorded the standard set by the games designers is such that
reasonably competent players should score about 100.
The results are as follows:
School 1
School 2
School 3
(i)
105
103
137
134
81
115
96
91
105
147
100
123
116
110
149
An analysis of variance is conducted on these results and gives the following

ANOVA table:
Source of variation
Between schools
Residual
Total
(a)
d.f.
SS
MSS
2
12
14
2,298
3,468
5,766
1,149
289
Test the hypothesis that there are no school effects against a general
alternative.
You should quote a narrow range of values within which the
probability-value of the data lies, and state your conclusion clearly.
(b)
CT3 A20086
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]
(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:
112 140 88 103 123.
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.
You should quote an approximate value for the probability-value of the
data, and state your conclusion clearly.
(b)
Comment briefly on the comparison of the results of the analysis

involving Schools 13 only conducted in part (i)(a) and the results here
of the analysis involving all four schools.
(c)
Calculate a 95% confidence interval for the difference in the

underlying mean scores for club members in Schools 1 and 2, using the
information available from all four schools.
[13]
[Total 20]
CT3 A20087
PLEASE TURN OVER
In a medical experiment concerning 12 patients with a certain type of ear condition,

the following measurements were made for blood flow (y) and auricular pressure (x):
13
8.5
3
x:
y:
9.8
12
10.8
10
11.5
14
11.2
8
9.6
7
10.1
9
13.5
13
14.2
17
11.8
10
8.7
5
6.8
5
x = 126.5 x 2 = 1,381.85 y = 113 y 2 = 1, 251 xy = 1, 272.2
(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.
(b)
Use your calculated confidence interval to comment on the hypothesis

that the true underlying slope coefficient is equal to 1.5.
[5]
(a)
Use a suitable pivotal quantity with a 2 distribution to derive a 95%

confidence interval for the underlying error variance 2, and calculate
the interval.
(b)
Hence calculate a 95% confidence interval for the error standard

deviation .
[5]
[Total 17]
(iv)
END OF PAPER
CT3 A20088

Core Technical
EXAMINERS REPORT
April 2008
Introduction
M A Stocker
June 2008
n = 80, fx = 22, fx2 = 40

x = 22 / 80 = 0.275
s2 =
1
222 33.95
= 0.42975 s = 0.656
40
=
79
80
79
x = nx = 29(461.5) = 13383.5
x 2 = (n 1) s 2 + nx 2 = 28(618.8) 2 + 29(461.5) 2 = 16898062
removing the outlier of 3657.5 gives

x = 13383.5 3657.5 = 9726
x 2 = 16898062 3657.52 = 3520756
x =
9726
= 347.4
28
1
97262
s = [3520756
] = 5272.6 s = 72.6
27
28
2
(i)
x=
23778
= 1829.08.
13
Median = 7th ordered observation = 1614.

(ii)
The median should be preferred, as it is not sensitive to the extreme observed

claim of 4320.
P ( A | B) =
P ( A B)
P ( B)
Maximum value of P(B) is 0.8 in which case P ( A | B ) =
0.1
= 0.125
0.8
Minimum value of P(B) is 0.1, in the case B A. Then P ( A | B ) = 1
Page 2
Define the following events:

C: Policy results in a claim;
Bi: Policy comes from portfolio i, i = 1, 2, 3, 4.
Then the required probability is P(B3|C), and using Bayes theorem:
P ( B3 | C ) =
P(C | B3 ) P( B3 )
P(C | B3 ) P( B3 )
,
=
P(C )
P(C | Bi ) P( Bi )
i
which gives
P ( B3 | C ) =
0.02
0.08
13
30
4
7
13
6
+ 0.05 + 0.02 + 0.04
30
30
30
30
0.26 / 30 0.26
=
= 0.222 .
1.17 / 30 1.17
[OR It is possible to argue straight to

260/(320 + 350 + 260 + 240) = 260/1170 = 0.222
which is correct and gets full marks.]
(i)
f ( y | x) =
f ( x, y )
f ( x)
4
(1 xy )
(1 xy )
3
, 0 < y <1
=
=2
2
(2 x)
(2 x)
3
(ii)
(a)
E (Y | X = x) =
1
2
y (1 xy )dy
(2 x) 0
2
y2
y3 1
2
1 x
(3 2 x)
=
[ x ]0 =
( )=
(2 x) 2
3
(2 x) 2 3 3(2 x)
E (Y ) =
=
1 (3 2 x )
2
(2 x)dx
0 3(2 x ) 3
2 1
2
4
2 1
=
(3
2
x
)
dx
[3
x
x
]
0
9 0
9
9
Page 3
(b)
(i)
E (Y ) =
2 1
2 2 y3 1 2 2 4
y
(2
y
)
dy
=
[ y ]0 = =
3 0
3
3
3 3 9
M X (t ) = E (etX ) = (1 4t ) 3 from yellow book

Let Y =
1
X.
2
M Y (t ) = E (etY ) = E (etX / 2 ) = M X (t / 2) = (1 2t ) 6 / 2
which is the m.g.f. of a gamma(3,1/2) or 62 variable
(ii)
P ( X > 20) = P(Y > 10)

= 1 0.8753 = 0.1247
Let L be the length of the metal bar and Zi be the error that arises at the ith cut.
Length of 1st post cut = L + Z1
Length of 2nd post cut = L + Z1 + Z2
Length of 100th post cut = L + Z1 + Z2 + + Z100
Error in length of last post cut is E = Z1 + Z2 + + Z100
E ~ N(0,900) approximately, by CLT
P(|E| <15) P(|Z| < 15/30) = P(|Z| < 0.5) = 2 0.1915 = 0.383
So P(error exceeds 15mm) 1 0.383 = 0.617
(i)
Probability of type I error is

= P(reject H 0 H 0 is true) = P ( X = 0 or X = 4 H 0 is true) ,
which gives
= P{ X = 0 P( Heads) = 0.5)} + P{ X = 4 P( Heads ) = 0.5)}

4
1 1
= + = 0.125.
2 2
Page 4
(ii)
Probability of type II error of the test at P(Heads) = 0.7 is

= P(accept H 0 H1 is true) = 1 P{ X = 0 or X = 4 P( Heads) = 0.7}
= 1 0.34 + 0.7 4 = 0.7518.
[OR using P{ X = 1 or X = 2 or X = 3 | P (heads ) = 0.7}]
10
range
observed frequency
expected frequency
01
45
100/3
12
35
100/3
23
20
100/3
2 = [(45 100/3)2 + (35 100/3)2 + (20 100/3)2]/(100/3) = 9.50 on 2df

P-value = P ( 22 > 9.50) < 0.01
Reject model (at the 1% level of testing) as not providing a good fit to the data.
OR 5% point of 22 is 5.991, so we reject model at 5%
OR 1% point of 22 is 9.210, so we reject model at 1%
11
(i)
(a)
The required probability is

P (T > tk ) = 1 P(T tk ) = 1 FT (tk )
= 1 (1 e tk ) = e tk (using formulae or by integration).
(b)
The likelihood function is given by:

k
L() = f (ti )
i =1
= eti
i =1
j = k +1
P(T > tk )
) (e ) = e
n
tk
ti
i =1
e ( n k ) tk
j = k +1
Page 5
For the MLE:

k
l ( ) = log L( ) = k log( ) ti (n k )tk

i =1
l ( ) =
k k
ti (n k )tk
i =1
l ( ) = 0 =
ti + (n k )tk
i =1
[And l ( ) =
(c)
<0]
For the observed data,

k
n = 20, k = 5, tk = 21.54,
ti = 54.82 .
i =1
ti + (n k )tk
5
= 0.0132 .
54.82 + 15 21.54
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 et0 ,
or will have not expired with probability 1 - p.
Therefore, K ~ bin n, 1 e t0
(b)
L() 1 e t0
) (e )
k
t0 n k
l ( ) = log L( ) = k log 1 et0 (n k )t0
l ( ) =
kt0 et0
1 et0
(n k )t0
l ( ) = 0 et0 =
Page 6
nk
1
k
= log 1
n
t0
n
[OR, observed proportion (k/n) is the MLE of corresponding

proportion/probability {1 exp(t0)}; solving for leads to same
estimate as above.]
(c)
Now t0 = 24 and all other involved quantities are as before.

1
1
5
k
= log 1 = log 1 = 0.0120 .

t0
24
n
20
12
(i)
(a)
F = 1149/289 = 3.98 on (2, 12) degrees of freedom

From Yellow Tables pages 172/3, P-value of the data is between 0.05
and 0.025.
We can reject H0 (the no schools effects hypothesis) at the 5% level
of testing but not at the 1% level. We have some evidence against the
no schools effects hypothesis and conclude that there are school
effects (i.e. differences among the underlying means).
(b)
School 1 mean = 598/5 = 119.6

t12(0.025) = 2.179
95% CI for school 1 mean is 119.6 2.179(289/5)1/2
i.e. 119.6 16.6 or
(ii)
(a)
(103.0, 136.2)
y1 = 598, y2 = 485, y3 = 629, y4 = 566

y = 2278, y2 = 266,788
SST = 266788 22782/20 = 7323.8
SSB = (5982 + 4852 + 6292 + 5662)/5 22782/20 = 2301
SSR = 7324 2301 = 5023
Source of variation
d.f.
Between schools
Residual
Total
3
16
19
SS
MSS
2301
5023
7324
767
314
F = 767/314 = 2.44 on (3, 16) degrees of freedom
Page 7
From Yellow Tables pages 172/3, P-value of the data is just more than
0.1 (>10%)
We do not have sufficiently strong evidence against the no schools
effects hypothesis, which can stand.
(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.
(c)
t16(0.025) = 2.120
0.5
1 1
95% CI is (119.6 97 ) 2.120 314 +
5 5
i.e. 22.6 23.76 or (1.2, 46.4)
13
(i)
A clearly labelled scatterplot:
There seems to be a positive linear relationship between blood flow and

auricular pressure.
Page 8
(ii)
n = 12
S xx = 1381.85
S yy = 1251
1132
= 186.9167
12
S xy = 1272.2
=
S xy
S xx
126.52
= 48.3292
12
(126.5)(113)
= 80.9917
12
80.9917
= 1.676
48.3292
1
= y x = (113 1.6758*126.5) = 8.249
12
Fitted line is y = -8.249 + 1.676x
(iii)
(a)

2
S xx
~ tn 2 where 2 =
P[tn 2 (2.5%) <

2
S xx
2
S xy
1
( S yy
)
n2
S xx
< tn2 (2.5%)] = 0.95
Rearrangement results in the 95% confidence interval for

2
t (2.5%)
n2
S xx
Here: 2 =
1
(80.9917) 2
(186.9167
) = 5.1188
10
48.3292
95% CI is 1.676 2.228(0.3254) 1.676 0.725 (0.95, 2.40)

(b)
As 1.5 lies comfortably inside this confidence interval, then there is no

evidence at all against the hypothesis that = 1.5.
Page 9
(iv)
(a)
(n 2) 2
~ 2n2
P[ n2 2 (97.5%) <
(n 2) 2
< 2n 2 (2.5%)] = 0.95
Rearrangement results in the 95% confidence interval for 2

(n 2) 2
n2 2 (2.5%)
< <
Here 95% CI is
(n 2) 2
n2 2 (97.5%)
10(5.1188)
10(5.1188)
< 2 <
20.48
3.247
(2.50,15.76)
(b)
95% CI for is ( 2.50, 15.76) (1.58,3.97)
Page 10
EXAMINATION

Core Technical
1.
booklet.
2.
supervisor.
3.
4.
5.

question paper.
CT3 S2008
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]
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.
duration (length of time held before being cashed in)
1 year
2 years
3 years
4 years
5 years
130
151
97
64
98
Calculate the sample mean and standard deviation of the duration of these bonds
before being cashed in.
(i)
[4]
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]
(ii)
Let X1 and X2 be independent gamma random variables with parameters

(1 , ) and ( 2 , ) , respectively .
Use mgfs to show that Y = X1 + X 2 is also a gamma random variable and
specify its parameters.
[2]
[Total 4]
A random sample of 15 observations is taken from a normally distributed population

of values. The sample mean is 94.2 and the sample variance is 24.86.
Calculate a 99% confidence interval for the population mean.
[3]
The number of claims, X, arising on each policy in a certain portfolio depends on

another random variable Y. X is considered to follow a Poisson distribution with
mean Y. The variable Y itself is assumed to have a gamma distribution with
parameters (a,b).
Find expressions for the unconditional moments E[X] and E[X 2] using appropriate
conditional moments.
[4]
CT3 S20072
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.
(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.
(iii)
[2]
[2]
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]
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
(i)
Determine the mean and the standard deviation of S.
(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]
CT3 S20083
[2]
PLEASE TURN OVER
(i)

0.9236 , 0.2578
and a suitable table of probabilities to simulate two observations of the random
variable X, where X ~ N(200,100).
[3]
(ii)

0.3287 , 0.9142
to simulate two observations of the random variable Y, where Y has an
exponential distribution with mean 100.
[3]
[Total 6]
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.
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.
0
-4
-2
Residuals
(i)
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 S20074
10
When a new claim comes into an office it is screened at a first stage and has a
probability 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
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 - , of being rejected at the second stage is (1 - ) and of progressing
after the two stages is 2.
[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() for this sample and hence show that the
derivative of the log-likelihood is given by
x + 2 x3 x1 + x2
.
log L() = 2
(b)
Show that the maximum likelihood estimator (MLE) is given by

=
x2 + 2 x3
.
x1 + 2 x2 + 2 x3
[7]
(iii)
(iv)
(a)
log L() of the log-likelihood in

2
part (ii) above and hence show that the Cramer-Rao lower bound
(1 )
(CRlb) is given by
.
n(1 + )
(b)
Use the asymptotic distribution for the MLE with the CRlb
evaluated at to obtain an approximate large-sample 95% confidence
interval for expressing it simply in terms of and n.
[7]
Determine the second derivative
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.
Calculate the MLE together with an approximate 95% confidence interval
for .
[3]
[Total 20]
CT3 S20085
PLEASE TURN OVER
11
Male
4
6
10
1
1
A study was conducted to investigate lengths of stay, in days, of short-term stay

patients in a particular hospital. Independent random samples of 40 male patients and
35 female patients were selected and the lengths of stay of these patients are given in
the following tables:
8
6
7
7
8
2
8
5
2
1
6
7
7
8
3
9
3
7
11
9
6
5
6
5
3
4
6
9
6
1
Male: x = 215 x2 = 1,481
10
1
2
2
3
Female
2
7
8
6
3
5
7
2
3
6
5
4
4
4
5
1
1
6
4
9
9
5
5
11
6
1
4
1
6
2
3
4
8
8
3
Female: x = 168 x2 = 1,026
The male observations are assumed to be normally distributed with mean 1 and
standard deviation 1 , and independently the female observations are assumed to be
normally distributed with mean 2 and standard deviation 2 .
(i)
Suppose that it is known that 1 = 3.0 days and 2 = 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 1 2.
(b)
Comment briefly on any implications of this confidence interval.

[6]
(ii)
Suppose now that 1 and 2 are unknown.

(a)
Perform a two-sample t-test to investigate whether there is a difference

between the mean length of stay for males and the mean length of stay
for females, assuming that 1 and 2 are equal.
(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
1 and 2 are equal, nor that the observations necessarily come from
normal populations.
Perform an alternative (large-sample) test to that conducted in part
(ii)(a), to investigate whether there is a difference between the mean
length of stay for males and the mean length of stay for females, and
compare the results of the test with the results of the test obtained in
part (ii)(a).
[11]
[Total 17]
CT3 S20076
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:
1
12
x
y
1
19
2
18
2
35
3
19
3
44
4
32
4
53
5
44
5
65
For these data x = 30, y = 341, x2 = 110, y2 = 14,345 , xy = 1,211

(i)
(ii)
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 leastsquares linear regression analysis of y on x, and hence calculate the
value of R2, the coefficient of determination.
(c)
Determine the equation of the fitted regression line.
(d)
Calculate a 95% confidence interval for the slope of the underlying

regression line.
[12]
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
y
1
2
3
4
5
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.
Regression equation: y = 5.90 + 9.40 x
Coef
Stdev
t-ratio
p-val
Intercept
x
5.900
9.400
2.233
0.673
2.64
13.96
0.078
0.001
s = 2.129
R-sq = 98.5%
Source
df
SS
Regression 1 883.60
Error
3
13.60
Total
4 897.20
MS
F
p-val
883.60 194.91 0.001
4.53
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 S20087

Core Technical
EXAMINERS REPORT
September 2008
Introduction
R D Muckart
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.
n = 30, x = 5200
n1 = 6, x1 = 8000
n2 = 10, x2 = 3100
n3 = 14
x=
x = n1x1 + n2 x2 + n3 x3
n1 + n2 + n3
x3 =
nx n1x1 n2 x2 30 5200 6 8000 10 3100 77000

=
=
= 5500
n3
14
14
data: f = 540, fx = 1469, fx2 = 5081

mean =
1469
= 2.72 years
540
variance =
(i)
1
14692
(5081
) = 2.0126
539
540
s.d. = 1.42 years
M Y (t ) = E (etY ) = E (et ( X1 + X 2 ) )
= E (etX1 ) E (etX 2 ) = M X1 (t ) M X 2 (t )
(ii)
t
M X i (t ) = (1 ) i
t
M Y (t ) = (1 ) (1 + 2 )
so that Y is a gamma r.v. with parameters (1 + 2 , ) .
t14(0.005) = 2.977
99% CI is 94.2 2.977
Page 2
24.86
15
i.e. 94.2 3.83 i.e. (90.37,98.03)
Subject CT3 (Probability and Mathematical Statistics Core Technical) September2008 Examiners Report
E ( X ) = EY { E X ( X Y )} = E (Y ) =
a
.
b
E ( X 2 ) = var( X ) + E 2 ( X )
with
var( X ) = EY {varX ( X Y )} + varY { E X ( X Y )}
= E (Y ) + var(Y ) =
a a
+
b b2
giving
a a a2
E( X ) = + 2 + 2 .
b b
b
2
{
{var
[OR E ( X 2 ) = EY E X ( X 2 Y )
= EY
( X Y ) + E X2 ( X Y ) = E (Y ) + E (Y 2 )
= E (Y ) + var(Y ) + E 2 (Y )
=
a a a2
.]
+ +
b b2 b2
(i)
T ~ Exp(0.5) and therefore P (T > 1) = e 0.51 = 0.6065 .
(ii)
The median, M, is such that
f (t )dt = 0.5 0.5e 0.5t dt = 0.5

0
which gives
1 e0.5 M = 0.5 M = 2 log(0.5) , or M = 2 log(2) = 1.386 .
(Note: the cdf is available from the Yellow Book, p11.)

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
2
, from which we can then use the
[OR Y ~ gamma(30,1/2), that is Y ~ 60
normal approximation as above, or get P(Y > 45) = 0.922 (approximately) by

2
(Yellow Book p168).]
interpolating in tables of percentage points of 60
(i)
E ( S ) = E ( N ) E ( X ) = (60)(500) = 30, 000

V ( S ) = E ( N )V ( X ) + V ( N )[ E ( X )]2
= (60)(4002 ) + (60)(5002 ) = 24, 600, 000 sd ( S ) = 4,960
(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.
P ( S > 40000) = P ( Z >
40000 30000
= 2.016)
4960
= 1 0.9781 = 0.0219
[Note: 2.02 leading to 0.0217 is also acceptable.]
(i)
From Yellow Book Table

P(Z < 1.43) = 0.9236 giving x value (10*1.43) + 200 = 214.3
P(Z < 0.65) = 0.2578 giving x value (10*(0.65)) + 200 = 193.5
(ii)
Setting r = P(Y < y) = 1 exp(y/100) y = 100*log(1 r)

r = 0.3287 y = 100log(0.6713) = 39.85
r = 0.9142 y = 100log(0.0858) = 245.6
Note: We can do away with the step of subtracting r from 1 and use.
y = 100*log(r). This gives y = 111.3, 8.971.
(i)
SSR = SST SSB = 420.05 337.32 = 82.73.

The degrees of freedom are 3 1 = 2 for the treatment (company) SS, and
12 1 2 = 9 for the residual SS.
Page 4
These give F =
337.32 2
= 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.
10
(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.
(i)
P(rejected at 1st) = 1 P(cleared at 1st) = 1

P(rejected at 2nd) = P(cleared at 1st)P(rejected at 2nd | cleared at 1st)
= (1 )
P(progressing after two) = P(cleared at 1st) P(cleared at 2nd) = 2
(ii)
(a)
L() = [(1 )]x1 [(1 )]x2 [2 ]x3

= x2 + 2 x3 (1 ) x1 + x2
log L() = ( x2 + 2 x3 ) log + ( x1 + x2 ) log(1 )
(b)
x + 2 x3 x1 + x2
log L() = 2

( x1 + x2 ) = (1 )( x2 + 2 x3 )
( x1 + 2 x2 + 2 x3 ) = x2 + 2 x3
x2 + 2 x3
x1 + 2 x2 + 2 x3
(iii)
(a)
x2 + 2 x3
log L() =
2
E{
x1 + x2
(1 ) 2
n(1 ) + 2n2
log L()} =
2
n(1 ) + n(1 )
(1 ) 2
Page 5
n
n
n(1 + )
1
1
= (1 + )
(1 + ) = n(1 + )( +
)=
1 )
(1 )
(1 )
1
CRlb =
E[
log L()]
2
2
(1 )
n(1 + )
N (, CRlb) for large n
(b)
using CRlb =
(1 )
(1 )
, then N (,
)
n(1 + )
n(1 + )
(1 )
95% CI is 1.96
n(1 + )
(iv)
96 + 2(794)
1684
=
= 0.8910
110 + 2(96) + 2(794) 1890
CRlb
0.8910(1 0.8910)
= 0.0000514 CRlb = 0.00717
1000(1 + 0.8910)
95% CI is 0.8910 1.96(0.00717)
0.891 0.014 or (0.877, 0.905)
11
(i)
(a)
Males: n1 = 40
x1 = 215/40 = 5.375
Females: n2 = 35 x2 = 168/35 = 4.8

95% CI:
x1 x2 z0.025
12 22
+
n1 n2
= 5.375 4.8 1.96
32 2.52
+
40 35
= 0.575 (1.96)(0.6353)
= 0.575 1.245 or (0.67, 1.82)
(b)
Page 6
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.
(ii)
(a)
s12 = (1481 2152/40)/39 = 8.34295
s22 = (1026 1682/35)/34 = 6.45882
s 2p =
(n1 1) s12 + (n2 1) s22

(39)(8.34295) + (34)(6.45882)
=
= 7.46541
40 + 35 2
n1 + n2 2
Two sample t-test
x1 x2
t=
1 1
s 2p +
n1 n2
5.375 4.8
1
1
7.46541 +
40 35
= 0.909
t73(0.025) = 1.996 (by interpolation of 2.000 and 1.980 for 60 df and

120 df)
[OR just quote the N(0,1) value 1.96 in place of the t73 value.]
Therefore there is no evidence to reject the null hypothesis that the
means for males and females do not differ at the 5% significance level,
and we conclude that the mean lengths of stay are the same.
(b)
s12
s22
8.34295
= 1.29
6.45882
Comparing this to an F39,34 distribution, which has a 5% critical point

between 2.075 and 1.717 (two-sided test), there is no evidence that the
population variances differ.
The assumption of common variance was made when conducting the
test in (ii)(a), and this seems valid given the result of the test in (ii)(b).
(c)
z=
x1 x2
s12 s22
+
n1 n2
5.375 4.8
8.34295 6.45882
+
40
35
= 0.917
Page 7
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)
(b)
SSTOT = Syy = 14345 3412/10 = 2716.9

x = 30, x2 = 110 so Sxx = 110 302/10 = 20
Sxy = 1211 30*341/10 = 188
SSREG = 1882/20 = 1767.2
SSRES = 2716.9 1767.2 = 949.7
R2 = 1767.2/2716.9 = 0.650 (65.0%)
(c)
y = a + bx:
b = 188 / 20 = 9.4
a = 341/10 9.4 (30 /10) = 5.9

Fitted line is y = 5.9 + 9.4x
(d)
()
t8(0.025) = 2.306
Page 8
1/ 2
949.7 / 8
s.e. b =
20
= 2.4363
95% confidence interval for b is given by 9.4 2.306 2.4363

i.e. 9.4 5.62 i.e. (3.78, 15.02)
(ii)
When we replace the pair of responses by their mean:

the equation of the fitted line remains the same
but otherwise the analyses do not produce equivalent results
the fit of the line is very much better [the goodness-of-fit measure R2 increases
to a very high value from 65% to 98.5%]
plus, for example:
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
Note: these and other relevant comments will receive credit.
Page 9
EXAMINATION
30 April 2009 (am)

Core Technical
1.
booklet.
2.
supervisor.
3.
4.
5.

question paper.
CT3 A2009
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
For these data: x = 216.9, x2 = 5,052.13, sample mean x = 18,075

sample median = 16,900, sample standard deviation s = 10,143.
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]
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(AB) = 0.1.
Find the probability that none of A, B, or C occurs.
[3]
The random variable X has probability density function
f ( x) = k (1 x)(1 + x),
0 < x <1,
where k is a positive constant.
(i)
Show that k = 1.5.
(ii)
Calculate the probability P(X > 0.25).
[2]
[2]
[Total 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]
The human resources department of a large insurance company currently estimates

that 82% of new employees recruited by their call centres will still be employed by
the company after one year. A recent extension to the call centre business led to 280
new employees being recruited.
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.
CT3 A20092
[3]
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 = 4 and = 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]
(ii)
Determine approximately the median of X .
[1]
[Total 3]
A survey is undertaken to investigate the frequency of motor accidents at a certain

intersection.
It is assumed that, independently for each week, the number of accidents follows a
Poisson distribution with mean .
(i)
In a single week of observation two accidents occur. Determine a 95%

confidence interval for , using tables of Probabilities for the Poisson
distribution.
[3]
(ii)
In an observation period of 30 weeks an average of 2.4 accidents is recorded.

Determine a 95% confidence interval for , using a normal approximation. [3]
(iii)
Comment on your answers in parts (i) and (ii) above.
[1]
[Total 7]
A random sample of 25 recent claim amounts in a general insurance context is taken

from a population that you may assume is normally distributed. In units of 1,000,
the sample mean is x = 9.416 and the sample standard deviation is s = 2.105.
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]
CT3 A20093
PLEASE TURN OVER
An analysis of variance investigation with samples of size eight for each of four
treatments results in the following ANOVA table.
Source of variation
d.f.
SS
MSS
Between treatments
Residual
Total
3
28
31
6716
3362
10078
2239
120
(i)
Calculate the observed F statistic, specify an interval in which the resulting

P-value lies, and state your conclusion clearly.
[3]
(ii)
The four treatment means are:

y1 = 85.0, y2 = 66.5, y3 = 59.0, and y4 = 95.5 .
(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
P(N = 0) = 0.70, P(N = 1) = 0.15, P(N = 2) = 0.10, P(N = 3) = 0.05.
Each claim amount, X (in units of 1,000), follows a gamma distribution with
parameters = 2 and = 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.
CT3 A20094
[5]
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 . Let X = (X1, X2, , Xn) be
a random sample from the distribution of X, and let X =
1 n
Xi .
n i =1
n
(i)
(a)
Use moment generating functions to show that
X i has a Poisson
i =1
distribution with mean n.

(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.
(d)
State the approximate distribution of X in the case that n is large.

[8]
An actuary is interested in the level of claims being experienced and wants in

particular to test the hypotheses
H0: = 1 v H1: > 1 .
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 = 1.2 and
then in the case = 1.5.
(c)
Comment briefly on the values of the power of the test obtained in part
(ii)(b).
[9]
[Total 17]
CT3 A20095
PLEASE TURN OVER
12
In a genetic plant breeding experiment a total of 1,500 plants were categorised into
one of four classes (labelled A, B, C and D) with the following results:
class:
frequency:
A
1071
B
62
C
68
D
299
A genetic model specifies that the probability that an individual plant belongs to each
class is given by:
class:
probability:
1
(2 + )
4
1
(1 )
4
1
(1 )
4
where is an unknown parameter such that 0 < < 1.

(i)
(a)
Write down the likelihood for these data and determine the loglikelihood.
(b)
Show that the maximum likelihood estimate (MLE) of is a solution

of the quadratic equation
7502 256 299 = 0
and hence that the MLE is given by = 0.825 .
(ii)
(iii)
[7]
(a)
Determine the second derivative of the log-likelihood and use this,

evaluated at = 0.825, to obtain an approximation for the Cramer-Rao
lower bound for this situation.
(b)
Hence calculate an approximate 95% confidence interval for , using

the asymptotic distribution of the MLE.
[5]
An extension of the genetic model suggests that the value of should be equal
to 0.775.
(a)
Carry out an appropriate 2 test to investigate the extent to which the

current data support the extended model with this value of (you
should calculate and comment on the P-value).
(b)
Comment briefly on how this relates to your approximate confidence

interval in part (ii)(b).
[6]
[Total 18]
CT3 A20096
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.
65
44
Midterm x
Final y
62
49
50
54
82
59
80
66
68
67
88
71
67
81
90
89
92
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 , to test the null
hypothesis H0: = 0 against H1: > 0.
(c)
Calculate a 95% confidence interval for the mean final examination

score for a midterm score of 75.
(d)
Consider now that we require a 95% confidence interval for an

individual predicted final examination score for a midterm score of 75.
State (giving reasons) whether this interval will be narrower or wider
than the one calculated in part (i)(c) above. (You are not asked to
calculate the interval.)
[13]
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: = 0 (where denotes the population correlation coefficient) can
be tested against H1: > 0, by using the result that under H0 the sampling distribution
of the statistic
(ii)
r n2
1 r2
is the tn-2 distribution (where n is the size of the sample).
(a)
Show algebraically, that is without referring to the specific data given

here, that in general the above statistic and the statistic involving 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 A20097

Core Technical
EXAMINERS REPORT
April 2009
Introduction
R D Muckart
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.
Revised mean = (216.9 3.1 46.2)/10 = 16.76 i.e. 16,760

Revised median = original median = 16,900
Revised x2 = 5052.13 3.12 46.22 = 2908.08
1/ 2
1
167.62
so revised standard deviation = 2908.08
10
9
= 3.31837 i.e. 3,318.37
P(ABC) = P(A) + P(B) + P(C) P(AB) P(AC) P(BC) + P(ABC)

= 0.3 + 0.5 + 0.2 0.1 (0.3 0.2) = 0.84
(OR via a Venn diagram)

So P(none occur) = 1 0.84 = 0.16
(i)
(ii)
x3
1
f ( x)dx = 1 k (1 x 2 )dx = 1 k x = 1 k 1 = 1 k = 1.5
3
3
0
0
P(X > 0.25) =
0.25 f ( x)dx
1
x3
= 1.5 0.422 = 0.633.
= 1.5(1 x )dx = 1.5 x
0.25
3
0.25
1
(i)
E[Yi ] = 2, Var[Yi ] = 4
Therefore E[Y1 + Y2] = 4 and (since Y1, Y2 independent) Var[Y1 + Y2] = 8.

So, for total loss, mean = 4,000 and variance = 8 106 (2).
(OR from Y1 + Y2 ~ 24 )
(ii)
For the total loss we have Y1 + Y2 ~ 42 , so we want a constant k
2
such that P 4 > k = 0.95.
From tables of the 24 distribution P 24 > 0.7107 = 0.95.

The total losses will exceed 710.7 with probability 0.95.
Page 2
Let X be the number still in employment after one year.

X ~ bin(280, 0.82) N (229.6, 6.432 )
P ( X 240) = P( X > 239.5) applying a continuity correction

= P( Z >
(i)
239.5 229.6
) = P ( Z > 1.54) = 1 0.93822 = 0.062
6.43
E[Xi] = 4/0.5 = 8 and Var[Xi] = 4/0.52 = 16 (or by noting X i ~ 82 ).

Var[ X i ]
Xi
X = i =1 N E[ X ],
, i.e. N(8, 0.4)
40
Using the CLT:
40
40
approximately.
[Note: The exact distribution of X is Gamma(160,20)]
(ii)
The symmetry of the distribution gives: median X = mean X = 8,

i.e. 800.
(i)
For a single observation x from Poisson() a 95% confidence interval for is

(1,2) where
p(r; 1) = 0.025
and
r=x
p(r; 2 ) = 0.025
r =0
So for x = 2
1 is s.t.
p(r; 1) = 0.025
r =2
i.e.
p(r; 1) = 0.975
r =0
From tables 1 is between 0.20 and 0.30 being about 0.24.
2 is s.t.
p(r; 2 ) = 0.025
r =0
From tables 2 is between 7.00 and 7.25 being about 7.23.

95% confidence interval for is (0.24, 7.23).
Page 3
(ii)
For a sample of n with observed mean x

X
N (0,1)
where = X
[OR: could use
X n
N (0,1) ]
giving an approximate 95% confidence interval as X 1.96
X
n
So for n = 30, x =2.4

95% CI is 2.4 1.96
(iii)
2.4
2.4 0.55 (1.85, 2.95)
30
The CI in (ii) is much narrower due to having more data.

(It is also centred higher due to the larger estimate.)
Let 2 be the population variance.

24 S 2
2
24S 2
~ 224 P 2 > 13.85 = 0.95

2 24S 2
2
2
P <
= 0.95 k = 24 2.105 / 13.85 = 7.678
13.85
k = 2.771 so upper confidence limit for is 2.771 i.e. 2771

(OR: CI is (0, 2.771) i.e. (0, 2771)).
(i)
F=
2239
= 18.66 on 3,28 d.f.
120
from tables F3,28(1%) = 4.568

P-value < 0.01 or 0 < P-v < 0.01
So there is overwhelming evidence of a difference between the underlying
treatment means.
Page 4
(ii)
(a)
1 1
1 1
LSD = t28 (2.5%) 2 ( + ) = 2.048 120( + ) = 11.2
8 8
8 8
(b)
means in order
y3. < y2. < y1. < y4.
underlined thus:
Treatments 2 & 3 are separate from treatments 1 & 4 which have
significantly higher means.
10
E [ N ] = 0.7(0) + 0.15(1) + 0.1(2) + 0.05(3) = 0.5
E N 2 = 0.15(1) + 0.1(4) + 0.05(9) = 1.00 Var [ N ] = 1.00 0.52 = 0.75

E[X ] =
2
2
= 20, Var [ X ] = 2 = 200
0.1
0.1
Let S = total of the claim amounts.

E [ S ] = E [ N ] E [ X ] = (0.5)(20) = 10 , i.e. 10,000.
V [ S ] = E [ N ]Var [ X ] + Var [ N ][ E ( X )]2 = (0.5)(200) + (0.75)(20) 2 = 400

sd ( S ) = 20 , i.e. 20,000.
11
(i)
(a)
Let S = X i
i =1
{(
)}
M X ( t ) = exp et 1
{(
)}
{ (
)}
n
M S ( t ) = {M X ( t )} = exp et 1 = exp n et 1
S ~ Poisson(n)
(b)
No
One reason is that E[2X1 + 5] = 2 + 5, which is not equal
to V[2X1 + 5] = 4
[Note: another obvious reason is that 2X1 + 5 can only takes values 5,
7, 9, , not 0, 1, 2, 3, ]
Page 5
(c)
No
One reason is that E X = , which is not equal to V X = / 2
[Note: another obvious reason is that X can take values 0.5, 1.5, 2.5,
, which a Poisson variable cannot.]
(d)
(ii)
(a)
(b)

X N ,
n
1
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
Power() = P(reject H0|)
Power( = 1.2) = P ( X > 1.2326 ) where X ~ N (1.2, 0.012)
= P(Z > 0.298) = 0.383
Power( = 1.5) = P ( X > 1.2326 ) where X ~ N (1.5, 0.015)
= P(Z > 2.183) = 0.985

(c)
12
(i)
(a)
Power of test increases as the value of increases further away from

= 1.
1
1
1
1
L() = [ (2 + )]1071[ (1 )]62 [ (1 )]68[ ]299 ( constant)
4
4
4
4
(2 + )1071 (1 )130 299
log L() = const + 1071log(2 + ) + 130 log(1 ) + 299 log

(b)
d
1071 130 299
log L() =
+
d
2 + 1
1071(1 ) 130(2 + ) + 299(2 + )(1 )

(2 + )(1 )
numerator = 1071 10712 260 1302 + 598 299 2992

equate to zero: 7502 256 299 = 0
Page 6
256 2562 4(750)(299)
=
= 0.17067 0.65406
2(750)
So MLE = 0.82473 (or 0.825 to 3dp) as other root is negative.
(ii)
(a)
d2
d
log L() =
1071
(2 + )
130
(1 )
299
2
d2
at = 0.825 ,
log L() = 134.20 4244.90 439.30 = 4818.4
d 2
CRlb =
(b)
1
d2
E 2 log L()
d
1
= 0.0002075
4818.4
N (, CRlb) for large samples

and so an approximate 95% CI for is 1.96 CRlb
Here: 0.825 1.96 0.0002075 0.825 0.028 or (0.797, 0.853)
(iii)
(a)
With = 0.775 the four probabilities are

0.69375, 0.05625, 0.05625, 0.19375 respectively
and the corresponding expected frequencies are
1040.625, 84.375, 84.375, 290.625.
2 =
( o e) 2
= 0.887 + 5.934 + 3.178 + 0.241 = 10.24 on 3 df
e
P-value = P (32 > 10.24) = 1 0.983 = 0.017

These data do not support the model with the value = 0.775 in that
the probability of observing these data when = 0.775 is only 0.017.
[OR: could say do not support at 5% level, but do support at 1%
level]
(b)
This is consistent with the fact that = 0.775 is well outside the
approximate 95% CI.
Page 7
(i)
(a)
The plot is given below.
70
60
30
40
50
Final exam score
80
90
100
13
50
60
70
80
90
Midterm score
There seems to be a positive relationship between final and midterm

score. However it is not clear if this relationship is linear.
[Following comment also valid: the relationship looks linear but with
substantial scatter.]
(b)
2
S xy
1
S yy
=
n2
S xx
s.e. ( ) =
1
(1529.8)2
= 2737.6
= 176.0241
8
1760.4
2
176.0241
=
= 0.3162
1760.4
S xx
To test H 0 : = 0 v H1 : > 0 , the test statistic is

0.869
0
=
= 2.748 ,
s.e.( ) 0.3162
and under the assumption that the errors of the regression are
i.i.d. N (0, 2 ) random variables, it has a t distribution
with n - 2 = 8 df.
Page 8
From statistical tables we find t8,0.05 = 1.860 , and t8,0.01 = 2.896 .

We reject the hypothesis H0: = 0 in favour of H1: > 0 at the 5%
level (but not at the 1% level).
(c)
The mean response, y new for xnew = 75 is

y new = 3.146 + 0.869 75 = 68.321 .
Its standard error is calculated as
1 ( xnew x ) 2
+
n
S xx
s.e.(y new ) =
= 13.26741
1 (75 74.4) 2
+
= 13.26741 0.31655
10
1760.4
= 4.1998
The 95% CI is given by y new t0.025,8 s.e.( y new ) ,

i.e. 68.321 2.306 4.1998 = 68.321 9.6847
or (58.636, 78.006)
(ii)
(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.
(a)
Both statistics follow a tn-2 distribution under the null hypothesis.

In addition
0
2
S xx
(b)
r=
Then
S xy
S xx
S xy
1
S yy
(n 2) S xx
S xx
S xy
S xx S yy
1 r
S yy 1
S xy
S xx
2
S xy
r n2
1 r2
S xx S yy
1529.8
= 0.6969.
1760.4 2737.6
r n2
(n 2) S xx
0.6969 8
1 0.6969
= 2.748 , same as in (i)(b).

Page 9
EXAMINATION
9 October 2009 (am)

Core Technical
1.
booklet.
2.
supervisor.
3.
4.
5.
Graph paper is not required for this paper.

question paper.
CT3 S2009
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
Number of households fx
1
7
2
f2
3
20
4
f4
5
18
6
10
7
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.
(i)
Calculate the missing frequencies f2 and f4.
[2]
(ii)
Find the median of these data, and hence comment on the symmetry of the
data.
[2]
[Total 4]
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]
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).
(i)
Show that CY(t) = bt + CX(at).
(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 Y)3]).
[5]
[Total 7]
CT3 S20092
[2]
Let the random variables (X,Y) have the joint probability density function
f X ,Y ( x, y ) = exp{( x + y )}, x > 0, y > 0.

(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]
(ii)
Derive the joint cumulative distribution function FX ,Y ( x, y ).
[2]
[Total 5]
Let X be a random variable with probability density function given by

f ( x) = 2 x2 ,
0 < x < .
Find an unbiased estimator of , based on a single observation of X.
[4]
A random sample of size n is taken from an exponential distribution with parameter

, that is, with probability density function
f ( x) = e x ,
(i)
0< x<.
Determine the maximum likelihood estimator (MLE) of .
[3]
Claim sizes for certain policies are modelled using an exponential distribution with
parameter . A random sample of such claims results in the value of the MLE of as
= 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.
(ii)
Determine p , the MLE of p, explaining why it is the MLE.
CT3 S20093
[3]
[Total 6]
PLEASE TURN OVER
A scientific investigation involves a linear regression with the usual assumptions that
the response variable y follows a normal distribution with mean + x and variance
2. Twenty data points were recorded, corresponding to four observations of y at
x = 1, three observations of y at x = 2, six observations of y at x = 3, and seven
observations of y at x = 4. The resulting means of these sets of y observations are
given in the table below.
x
no. of y's
mean of y's
1
4
18.6
3
6
23.2
4
7
27.1
(i)
Determine the fitted regression line of y on x.
(ii)
Suppose that you have been asked to provide a 95% confidence interval for
the slope coefficient.
[5]
(a)
Comment briefly on any problems you might encounter in the

computation of the required confidence interval.
(b)
Indicate briefly any further information that you would need in order
to overcome these problems.
[3]
[Total 8]
The table below shows a bivariate probability distribution for two discrete random
variables X and Y:
Y=1
Y=2
Find the value of E[X|Y = 2].
2
3
21.7
X=0
0.15
0.05
X=1
0.20
0.15
X=2
0.25
0.20
[3]
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 S20094
10
Consider a population in which a proportion 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
E [ P ] = ,
s.e.[ P ] =
(1 )
n
[3]
An insurance company uses a questionnaire to monitor the satisfaction of its

customers.
In one part customers are asked to answer yes or no to a particular question.
Suppose that a random sample of 200 responses is examined.
(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 () 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 .
(b)
Calculate a lower (one-sided) 95% confidence interval of the form

(L, 1) for .
(c)
A test of the hypotheses:

H0: = 0.7 v H1: > 0.7
results in a P-value of 0.198.
Comment on how this result relates to the confidence interval in part
(iii)(b).
[9]
[Total 16]
CT3 S20095
PLEASE TURN OVER
11
Three insurance company colleagues had just completed an investigation which

involved the application of a two-sample t-test to compare two independent samples,
each of size 11. They were concerned about the validity of the equal variance
assumption required for this test. Their data were as follows.
A:
B:
21
19
22
18
28
38
27
33
20
24
23
39
26
22
32
20
25
28
21
26
30
30
x A = 275, x 2A = 7, 033, xB = 297, xB2 = 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)
(iii)
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]
The third colleague suggested another procedure using a two-sample t-test in

the following way:
For each sample calculate the absolute values of the
deviations of the observations from the mean of that sample;
then apply a two-sample t-test to the two sets of absolute
deviations.
(a)
Discuss the possible reasoning behind this suggested procedure by

considering the potential values of such absolute deviations when the
assumption of equal variances is valid and when it is not valid.
(b)
(1)
Calculate the required sets of absolute deviations for the given

data.
(2)
Perform the suggested two-sample t-test at the 5% level stating

your conclusion clearly.
(3)
Obtain, in addition, an approximate P-value for this test by

linearly interpolating between suitable entries in the tables.
[11]
(iv)
Comment briefly on the conclusions that may have been reached by the three
colleagues.
[2]
[Total 22]
CT3 S20096
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
banks 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.
Recorded message
Time
Total
5 1 11 2 8
A: advertisement
B: easy listening music 0 1 4 6 3
C: classical music
13 9 8 15 7
27
14
52
For these data y = 93, y2 = 865

Let A , B , C 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.
(b)
Calculate a 95% confidence interval for A C , using information

available from all three samples.
[11]
An equivalent approach for analysing the effects of the recorded messages on holding
time is the following:
consider the regression model E[Yi ] = a + b1xi1 + b2 xi 2 , i = 1, 2, , 15, where
Yi is the telephone holding time and xi1, xi 2 are indicator variables such that
xi1 = 1 if the message for caller i contains an advertisement (and 0 otherwise),
and xi 2 = 1 if the message contains easy listening music (and 0 otherwise).
The results from fitting this model are given below:
Coef.
Intercept
x1
x2
s = 3.406
CT3 S20097
10.400
5.000
7.600
Std. Error t-value

1.523
2.154
2.154
p-value
6.828 1.8 * 10-5

2.321
0.039
3.528
0.004
R-sq = 51.7%
PLEASE TURN OVER
(ii)
Using the fitted model:

(a)
Calculate the predicted value for the telephone holding time when the
message contains classical music.
(b)
Test the hypothesis H0: b1 = 0 against H1: b1 0 at the 5% level of

significance.
(c)
Derive an expression relating b1 with A and C , and hence verify

your result from the test in (ii)(b) using the confidence interval
obtained in (i)(b).
[7]
[Total 18]
END OF PAPER
CT3 S20098

Core Technical
September 2009 Examinations
EXAMINERS REPORT
Introduction
R D Muckart
December 2009
Comments for individual questions are given with the solutions that follow.
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
(i)
We have 60
These give f 2
f 4 100 and
f2
40
4.
f 4 and 2 f 2 4 f 4 148
from which we obtain f 2

(ii)
7 2 f 2 60 4 f 4 90 60 35
100
6 and f 4
34 .
Median is equal to the midpoint between the 50th and 51st ordered
observations, i.e. median = 4.
We have mean = median, suggesting that the distribution of these data is

roughly symmetric.
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
(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
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)
(ii)
CY(t) = 2t + log(1 3t)2 = 2t 2log(1 3t)
CY (t) = 2 + 6(1 3t)-1 , CY (t) = 18(1 3t)2 , CY (t) = 108(1 3t)3
E[(Y
Page 2
Y)2] = CY (0) = 18, E[(Y
Y)3] = CY (0) = 108
Subject CT3 (Probability and Mathematical Statistics Core Technical) September 2009 Marking Schedule
coefficient of skewness of Y = 108/183/2 = 21/2 = 1.414
OR note that coefficient of skewness of Y = coefficient of skewness of X and

just work with X (some candidates may recognise X ~ Gamma(2,1) and
comment on the formula for coefficient of skewness (2/ ) given in the
Yellow Book).
4
(i)
f X ( x)
f ( x, y)dy
0
fY ( y)
x y
dy e
x y
dx e
f ( x, y)dx
0
0
x y
Since f X ,Y ( x, y ) e
[OR by symmetry].
f X ( x) fY ( y ) , X and Y are independent.
xy
(ii)
FX ,Y ( x, y)
u v
dvdu
00
y
x
u
FX ,Y ( x, y)
e v dv
e du
0
u x
0
v y
0
1 e
1 e
5
E[ X ]
xf ( x)dx
2
3
Consider Z
x3
3
X
2
2x2
dx
2
.
3
1
3
E[ X ]
2
E[Z ]
Z is an unbiased estimator of
6
(i)
L( )
log L( )
xi
n log
xi
e
xi
1
d
log L( )
d
and
Equate to zero for the MLE
n
Xi
xi
1
X
(second derivative is clearly negative, so maximum)
Page 3
(ii)
p = P(X > 4000) = exp(4000) for the exponential distribution
exp( 4000 ) using the invariance property of MLEs
exp( 4000(0.00124)) 0.0070
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
S xy
69.48
25.2
1
(56)(468.4) 69.48 and S xx
20
1381.0
182
1
(56)2
20
25.2
1
1
2.757
1
[468.4 (2.757)56] 15.7
20
y 15.7 2.757 x
(ii)
(a)
95% CI for is t0.025,18
2
S xx
So we need to calculate
2
1
n 2
( yi
x )2
i
or
1
n 2
( S yy
2
S xy
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

set).
y 2 for each
8
X|Y = 2 takes values 0, 1, 2 with probabilities 1/8, 3/8, 4/8
Page 4
(being in the ratios 1:3:4)
So E[X|Y = 2] = 1(3/8) + 2(4/8) = 11/8 = 1.375
9
(i)
E(amount) = 0.8(1650) + 0.2(625) = 1,320 + 125 = 1,445
(ii)
E(number of claims) = 150000(0.15) = 22,500
E(total claim amount) = 22500(1445) = 32,512,500
10
(i)
(ii)
(iii)
Number of sample members with the characteristic X ~ bi(n,) with mean

n and variance n (1 ). P = X/n.
E[P] = n / n =
s.e.[P] = {V[P]}1/2 = {V[X]/n2}1/2 = {n (1 )/n2}1/2 = { (1 )/n}1/2
X ~ bi(200, 0.7) with mean 140 and variance 42
P Z
149.5 140
42
P( X
150)
P( Z
1.466) 0.071
(a)
Sample proportion P ~ N( (1 )/200)
Observed P = 146/200 = 0.73

Estimated standard error(P) = (0.730.27/200)1/2 = 0.03139
Pr
P
e.s.e. P
Pr
1.645
0.95
P 1.645 e.s.e. P
0.95
Upper 95% CI is given by (0, 0.73 + 1.6450.03139)

i.e. (0, 0.782)
(b)
By analogy with (i),

Lower 95% CI is given by (0.73 1.6450.03139, 1)
(c)
i.e. (0.678, 1)
The Pvalue indicates that the null hypothesis = 0.7 can stand
and we do not have to conclude that > 0.7.
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.
The two results complement each other.
11
(i)
Dotplots on same scale are most suitable

[alternatively boxplots or histograms are acceptable]
Page 5
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
(ii)
(a)
s 2A
1
2752
7033
10
11
15.8
sB2
1
297 2
8559
10
11
54.0
3.418 on 10, 10 df
sB2
s 2A
54.0
15.8
For a two-sided test at the 5% level, critical value is

F10,10(2.5%) = 3.717
So we accept H 0 :
(b)
2
A
1
2
B
at the 5% level.
F10,10(2.5%) = 3.717 and F10,10(5%) = 2.978

So P-value is between 0.05 and 0.10
By interpolation: P-value is
0.05
(iii)
(a)
3.717 3.418
(0.10 0.05) 0.05 (0.405)(0.05) 0.070
3.717 2.978
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.
(b)
(1)
xA
275
11
25
So the deviations for sample A , i.e. d A

4 3 3 2 5 2 1 7 0 4 5
Page 6
| xA xA | , are
xB
297
11
27
So the deviations for sample B , i.e. d B
| xB
xB | are
8 9 11 6 3 12 5 7 1 1 3
(2)
Calculations:
dA
36,
d A2 158 and
dB
66,
d B2
540
dA
36
11
2
3.273 and sdA
1
362
158
10
11
4.018
dB
66
11
2
6.000 and sdB
1
662
540
10
11
14.400
2
sdp
10(4.018) 10(14.400)
20
obs. t =
3.273 6.000
1 1
3.035
11 11
3.035
2.107 on 20 df
9.209
2.727
1.294
sdp
For the two-sided test at the 5% level, critical value is

t20(2.5%) = 2.086
So we just reject H 0 :
at the 5% level.
(3)
dA
dB
and hence H 0 :
2
A
1
2
B
t20(2.5%) = 2.086 and t20(1%) = 2.528

So P-value is between 0.02 and 0.05
By interpolation: P-value is
0.02
(iv)
2.528 2.107
(0.03) 0.02 (0.952)(0.03) 0.049
2.528 2.086
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.
12
(i)
(a)
yA = 27, yB = 14, yC = 52 , y = 93, y = 865

SST = 865 932/15 = 288.4
Page 7
2
SSB = (27 + 14 + 52 )/5

SSR = 288.4
93 /15 = 149.2
149.2 = 139.2
Source of variation
d.f.
SS
MSS
Between
149.2
74.6
Residual
12
139.2
11.6
Total
14
288.4
2
(b)
F = 74.6/11.6 = 6.431 on (2,12) degrees of freedom.
From yellow tables, F2,12(0.05) = 3.885 and F2,12(0.01) = 6.927.
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.
t12(0.025) = 2.179
1
95% CI is (5.4 10.4) 2.179 11.6
5
i.e. 5 4.694
(ii)
(a)
or ( 9.694, 0.306)
10.4
2
1
The P-value is 0.039. We have evidence to reject the hypothesis that

b1 = 0 at the 5% level of significance.
(c)
0.5
We have yi 10.4 5.0 xi1 7.6 xi 2 and for classical music

message we need xi1 xi 2 0 .
This gives yi
(b)
1
5
For xi1 1, xi 2
and xi1
b1
xi 2
A
0 we have
0 gives
a b1
1
1
The 95% CI for A C in (i)(b) can be used for testing H0:

0 and equivalently H0: b1 = 0. The interval does not include
A
C
the value 0, and thus we reject H0 at the 5% level.
2
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Faculty of Actuaries

Probability and Mathematical Statistics

Mark allocations are shown in brackets.

Candidates should show calculations where this is appropriate.

Graph paper is required for this paper.

AT THE END OF THE EXAMINATION

Suppose A, B and C are events with P ( A) = 12 , P ( B ) = 12 , P(C ) = 13 , P ( A

Determine whether or not the events A and B are independent.

Claim sizes in a certain insurance situation are modelled by a distribution with

In a survey conducted by a mail order company a random sample of 200 customers

It is required that the probability of rejecting H0 when = 0.8 should be

Show that the test requires

is the standard normal distribution function.

PLEASE TURN OVER

Show that we can obtain a simulated observation of X by calculating

where r is an observation of a random variable which is uniformly

Explain why we can just as well use the formula

to obtain a simulated observation of X.

For these data

Conduct an analysis of variance test to establish whether the data indicate

Make a rough plot of the residuals against the treatment means.

State the assumptions underlying the analysis of variance test

Comment on how well the data conform to these assumptions in the

It is suggested that any differences can be explained in terms of a difference

PLEASE TURN OVER

A random variable Y has a Poisson distribution with parameter but there is a

Show that the probability function of Y is given by

Show that E[Y ] = /(1 e ).

Let y1, , yn denote a random sample from the zero-truncated Poisson

The above data were modelled by a zero-truncated Poisson distribution as

Calculate an approximate 95% confidence interval for and hence

Mortality rate m (per 10,000)

Sickness rate s (per 1,000)

Probability and Mathematical Statistics

Subject CT3 (Probability and Mathematical Statistics Core Technical)

so the events A and B are independent as

[OR Use a Venn diagram]

Subject CT3 (Probability and Mathematical Statistics Core Technical)

40, so V[S2] = 40/25 = 1.6

0.048 or (0.812, 0.908)

Let S = X1 + X2 + . . . + XN be the total claim amount.

s.d. of the total claim amount = 7,071

Width of 95% confidence interval: 1.96

For the width of a 95% confidence interval to be at most

i.e., take the sample size as 554.

Subject CT3 (Probability and Mathematical Statistics Core Technical)

The confidence interval in (ii) in narrower

to achieve this we require a

for large n by the central limit theorem.

P(reject H0| = 0.8) = P( X > k| = 0.8)

P(do not reject H0| = 1.2)

= P(reject H0 when H0 is true) = P ( X

(0.18) 1 0.57 0.43.

The significance level of the test is very high (43%).

X takes positive values only so to have such a relatively high standard

R ~ U(0,1) 1 R ~ U(0, 1) so (1 r) is also a random number from

Subject CT3 (Probability and Mathematical Statistics Core Technical)

SST = 77249 12032/20 = 4888.55

F3,16(0.05) = 3.239, F3,16(0.01) = 5.292

Residual = observed value treatment mean