Pricing rain insurance

An arranger of a sports event like to take a rain insurance.

Pricing must be based on weather statistics and agreed indemnities.

rain (mm) prob. indemnity

0-2 53% -
3-5 30% 500
6-10 15% 1000
11- 2% 3000

Expected value of indemnity 360

Insurance price is expected value + insurance company's premium.

Investment profitability

euros/year probability
Investment cost 100000
Return if boom 180000 40%
Return if recession 110000 60%

Expected value of revenue 138000

Revenue percent 38%

Lottery tickects

Amount of tickets 1000

euros count
Winning tickets 500 1
300 10
100 20

Expected win / ticket 5.5 euros

Warranty repair effect on car price

An Importer of a car model has history data on warranty repairs:

Average repair under warranty prob.

150 20%
400 25%
600 5%

What is the effect of warranty to the car price?

Expected repair under warranty 160 euros
Event P Q R s Sum-C
A 2 34 5 4 45
B 2 4 3 3 12
C 3 3 3 3 12
D 45 3 3 3 54
0
sum-R 52 44 14 13 123

Marginal Prob (Occurrence of A and P in total sample size Conditional prob (P(A/P)Occurrence of A when
Event P Q R s Sum-C P Q R
A 0.01626 0.276423 0.04065 0.03252 0.365854 A 0.038462 0.772727 0.357143
B 0.01626 0.03252 0.02439 0.02439 0.097561 B 0.038462 0.090909 0.214286
C 0.02439 0.02439 0.02439 0.02439 0.097561 C 0.057692 0.068182 0.214286
D 0.365854 0.02439 0.02439 0.02439 0.439024 D 0.865385 0.068182 0.214286
0 0 0
SUM-R 0.422764 0.357724 0.113821 0.105691 1

OR
P Q R s Sum-C
A 0.772358 0.447154 0.439024 0.439024
B 0.504065 0.422764 0.186992 0.178862
C 0.495935 0.430894 0.186992 0.178862
D 0.495935 0.772358 0.528455 0.520325

SUM-R
(A/P)Occurrence of A when sample Size of P) Conditional prob (P(P/A)Occurrence of A when sample Size of P)
s P Q R s
0.307692 A 0.044444 0.755556 0.111111 0.088889
0.230769 B 0.166667 0.333333 0.25 0.25
0.230769 C 0.25 0.25 0.25 0.25
0.230769 D 0.833333 0.055556 0.055556 0.055556
0
ample Size of P)
Binomial distribution probabilities

You can change the bordered values

Number of trials 5
Probablity of success 70.00%

Number of successes 1
Probablility 2.8350 % INVERSRE 97.17%
Cumulative probability 3.0780 % INVERSRE Cum 96.92%
Inv Prob
n trials and probability of success p on each trial,

The mean
The variance of X is
of X is
binomial

3.50000 1.05
The
standard
deviation
of X is

1.0246951
Poisson distribution proabilities

You can change the bordered values

Average number of successes 6.00 Average number of successes

Number of successes 5 Number of successes

Probablility 16.0623 % value or less Probablility
Cumulative probability 44.5680 % Cumulative probability

Inverse 83.938% Inverse

value or
more
55.432% x=x-1
 6.00

4
13.3853 % 2.677052%
28.5057 % 16.062314% If asked exactly

0.8661
Normal distribution probabilities

You can change the bordered values

Mean 40.0000
Standard deviation 15.0000
50
Random variable value 650.0000
Probability for less than 100.0000 %
Probability for more than 0.0000 %

Norman distribution random variable values

You can change bordered values

Mean 65.1600
Standard deviation 10.0000

Cumulative probability for X less

than 99.0000 %
Random variable value 88.4235
Mean 45.0000
Standard deviation 10.0000

Random variable value 5250.0000

Probability for less than 100 %
Probability for more than 0.0000 %

Norman distribution random variable values

You can change bordered values

Mean 26.0000
Standard deviation 1.0000

Cumulative probability 2.5000 %

Random variable value 24.0400
Binomial example 1

Every third lottery ticket wins.

Calculate the probability distribution for wins if you buy six tickets.

n= 6
p= 33.3 %

Wins Probability
0 0.0877915
1 0.26337449
2 0.32921811
3 0.21947874
4 0.08230453
5 0.01646091
6 0.00137174
Binomial example 2

Assume such an air route that on the average 5% of customers don’t come to
the flight. Airline company takes 210 reservations for a plane with 200 seats.
Calculate the risk for more than 200 customers arriving.

n= 210
p= 95%

Probability for at most 200 arriving

60.7 %
Probability for more than 200
39.3 %
Binomial example 3

Assume that 50% of population is against new nuclear power plant.

What is the probability to get more than 530 (53%) opponents of nuclear power plant
if you use sample size of 1000.

Number of trials 1000

Probablity of success 50%

Number of successes 530

Prob. for at most 530 97.3 %
Prob. for more than 530 2.7 %

What is the probability to get 470-530 (47%-53%) opponents?

Number of successes 469

Prob. For at most 470 2.7 %
Prob. For 470-530 94.6 %
Poisson example 1

On the average 3 customers per hour arrive first aid station.

How many patients should we be prepared to care if we want that our resources
are sufficient in 95% probability.

Mean 3

customers prob. cum. prob.

0 4.98% 4.98%
1 14.94% 19.91%
2 22.40% 42.32%
3 22.40% 64.72%
4 16.80% 81.53%
5 10.08% 91.61%
6 5.04% 96.65%
7 2.16% 98.81%
8 0.81% 99.62%
9 0.27% 99.89%
10 0.08% 99.97%
11 0.02% 99.99%
12 0.01% 100.00%
13 0.00% 100.00%
14 0.00% 100.00%
15 0.00% 100.00%
Poisson example 2

Sales figure for certain TV model is 5 per week.

How many TVs we should have in stock if we want to be 90% sure that there are
enough for one week.

Mean 5

customers prob. cum. prob.

0 0.67% 0.67%
1 3.37% 4.04%
2 8.42% 12.47%
3 14.04% 26.50%
4 17.55% 44.05%
5 17.55% 61.60%
6 14.62% 76.22%
7 10.44% 86.66%
8 6.53% 93.19%
9 3.63% 96.82%
10 1.81% 98.63%
11 0.82% 99.45%
12 0.34% 99.80%
13 0.13% 99.93%
14 0.05% 99.98%
15 0.02% 99.99%
Normal example 1

Intelligent quotient (I.Q.) is normally distributed N(100,16).

a) Calculate the proprotion of people below 80.

b) Calculate the proportion of people above 110.
c) Calculate the proportion of people between 68-132.
d) Calculate the minimum I.Q. for most intelligent 10%.
e) Calculate the range for 99% of people.

a) b)

Mean 40.0000 Mean

Standard deviation 15.0000 Standard deviation

Random variable 50.0000 Random variable

Probability for less than 74.7507 % Probability for less than
Probability for more than 25.2493 % Probability for more than

c)

Mean 850.0000 Mean

Standard deviation 150.0000 Standard deviation

Random variable 750.0000 Random variable

Probability for less than 25.2493 % Probability for less than
Probability for more than 74.7507 % Probability for more than

BETWEEN 750 And 1200 73.7692 %

d)

Mean 850.0000
Standard deviation 150.0000

Cumulative probability 25.0000 %

Random variable value less than 748.8265
value More than 951.1735

e)

Mean 100.0000 Mean

Standard deviation 16.0000 Standard deviation

Cumulative probability 0.5000 % Cumulative probability

Random variable 58.7867 Random variable
 Test
45.0000 Mean 26.0000 Mean
10.0000 Standard deviation 1.0000 Standard deviation

50.0000 Random variable 23.0000 Random variable

69.1462 % Probability for less than 0.1350 % Probability for less than
30.8538 % Probability for more than 99.8650 % Probability for more than

850.0000 Mean 26.0000 Mean

150.0000 Standard deviation 1.0000 Standard deviation

1200.0000 Random variable 24.0000 Random variable

99.0185 % Probability for less than 2.2750 % Probability for less than
0.9815 % Probability for more than 97.7250 % Probability for more than

Between 68 - 132 81.8595 % 90.702693

100.0000
16.0000

99.5000 %
141.2133
 26.0000
1.0000

28.0000
97.7250 %
2.2750 %

26.0000
1.0000

27.0000
84.1345 %
15.8655 %
Normal example 2

Paper machine produces paper, the weight (per square meter) of which is distributed N(81g;2,5g).
 
Customer wants that 90% of paper weights at least 80 grams.
It is possible to set paper machine’s expected value but not standard deviation.

Define the expected value needed to fulfill customers needs.

Expected value 83.2900 (try different values)

Standard deviation 2.5000

Random variable value 80.0000

Probability for less than 9.4087 %
Probability for more than 90.5913 % (Try different values to cell B10 until probability is a bit more than 90%)
84.203879

Expected value 5250.0000 (try different values)

Standard deviation 500.0000

Random variable value 80.0000

Probability for less than 0.0000 %
Probability for more than 25.0000 % (Try different values to cell B10 until probability is a bit more than 90%)
84.203879
0.25
d N(81g;2,5g).

ability is a bit more than 90%)

8078383880

ability is a bit more than 90%)

Normal example 3

Bread sales is distributed N(120, 15).

How much bread should be ordered if you want to be 95% sure that there is enough.

Expected value 850 Expected value 5250

Standard deviation 150 Standard deviation 15
Certainty 15% Certainty 95%

Order 695 Order 5275

Normal example 4

Daily revenue of a stock portfolio is distributed N(0,06% ; 2%-unit).

Calculate such a daily revenue that probability for worse revenue is 5% (also called 5% Value at Risk).

Expected value 0.06

Standard deviation 2

Probability 5%

Value at Risk -3.229707 (There is 5% probability that loss is even bigger than this one)

Value at Risk is commonly used measure of risk!

Value at Risk).