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) 0-2 3-5 6-10 11prob. 53% 30% 15% 2% indemnity 500 1000 3000

Expected value of indemnity 360 Insurance price is expected value + insurance company's premium.

Investment profitability
euros/year probability 100000 180000 40% 110000 60% 138000 38%

Investment cost Return if boom Return if recession Expected value of revenue Revenue percent

Lottery tickects
Amount of tickets 1000 euros 500 300 100 count 1 10 20

Winning tickets

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 150 400 600 prob. 20% 25% 5%

What is the effect of warranty to the car price? Expected repair under warranty 160 euros

Binomial distribution probabilities

You can change the bordered values Number of trials Probablity of success Number of successes Probablility Cumulative probability 100 15.00% 10 4.4353 % 9.9447 %

Poisson distribution proabilities

You can change the bordered values Average number of successes Number of successes Probablility Cumulative probability 5.00 6 14.6223 % 76.2183 %

Normal distribution probabilities

You can change the bordered values Mean Standard deviation Random variable value Probability for less than Probability for more than 0.0000 1.0000 1.9600 97.5002 % 2.4998 %

Norman distribution random variable values

You can change bordered values Mean Standard deviation Cumulative probability Random variable value 0.0000 1.0000 2.5000 % -1.9600

Binomial example 1
Every third lottery ticket wins. Calculate the probability distribution for wins if you buy six tickets. n= p= Wins 0 1 2 3 4 5 6 6 33.3 % Probability 0.0877915 0.26337449 0.32921811 0.21947874 0.08230453 0.01646091 0.00137174

Binomial example 2
Assume such an air route that on the average 5% of customers dont 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= p= 210 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 Probablity of success Number of successes Prob. for at most 530 Prob. for more than 530 1000 50% 530 97.3 % 2.7 %

What is the probability to get 470-530 (47%-53%) opponents? Number of successes Prob. For at most 470 Prob. For 470-530 469 2.7 % 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 customers 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 prob. 4.98% 14.94% 22.40% 22.40% 16.80% 10.08% 5.04% 2.16% 0.81% 0.27% 0.08% 0.02% 0.01% 0.00% 0.00% 0.00% 3 cum. prob. 4.98% 19.91% 42.32% 64.72% 81.53% 91.61% 96.65% 98.81% 99.62% 99.89% 99.97% 99.99% 100.00% 100.00% 100.00% 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 customers 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 5 prob. cum. prob. 0.67% 0.67% 3.37% 4.04% 8.42% 12.47% 14.04% 26.50% 17.55% 44.05% 17.55% 61.60% 14.62% 76.22% 10.44% 86.66% 6.53% 93.19% 3.63% 96.82% 1.81% 98.63% 0.82% 99.45% 0.34% 99.80% 0.13% 99.93% 0.05% 99.98% 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) Mean Standard deviation Random variable Probability for less than Probability for more than 100.0000 16.0000 80.0000 10.5650 % 89.4350 % b) Mean Standard deviation Random variable Probability for less than Probability for more than

c) Mean Standard deviation Random variable Probability for less than Probability for more than Between 68 - 132 100.0000 16.0000 68.0000 2.2750 % 97.7250 % 95.4500 % Mean Standard deviation Random variable Probability for less than Probability for more than

d) Mean Standard deviation Cumulative probability Random variable 100.0000 16.0000 90.0000 % 120.5048

e) Mean Standard deviation Cumulative probability Random variable 100.0000 16.0000 0.5000 % 58.7867 Mean Standard deviation Cumulative probability Random variable

100.0000 16.0000 110.0000 73.4014 % 26.5986 %

100.0000 16.0000 132.0000 97.7250 % 2.2750 %

100.0000 16.0000 99.5000 % 141.2133

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 machines expected value but not standard deviation. Define the expected value needed to fulfill customers needs. Expected value Standard deviation Random variable value Probability for less than Probability for more than 83.3000 (try different values) 2.5000 80.0000 9.3418 % 90.6582 % (Try different values to cell B10 until probability is a bit more than 90%)

d N(81g;2,5g).

ity 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 Standard deviation Certainty Order 120 15 95% 145

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 Standard deviation Probability Value at Risk 0.06 2 5% -3.22971 (There is 5% probability that loss is even bigger than this one)

Value at Risk is commonly used measure of risk!

Value at Risk).