ST338

UNIVERSITY OF WARWICK:
CLASS TEST 1: 30 JANUARY 2014
Actuarial Models
Time allowed: 1 hour
Answer all questions. The marks for each question are indicated at the end of each question. The
total mark for all questions is 100.
Read carefully the instructions on the answer book and make sure that the particulars required are
entered on each answer book.
Actuarial tables / formulae will be available where necessary.

1.

(a)

Explain the meaning of the following: (a) weakly stationary, (b) strictly stationary,
(c) independent increments, (d) Markov property.
[16]

Consider the process {Xt ,t {1,2,... }} where the {Xt } are all independent, and
if t is odd, P{Xt = 05} = 21 = P{Xt = -05}
and if t is even, P{Xt = 1} = 81 = P{Xt = -1} , P{Xt = 0} = 34
(b)

Show that the process is weakly stationary but not strictly stationary.

[8]
[Total 24]

2.

It is claimed that the force of mortality, (t), for new computers is a constant, , for 5 days,
and then reduces to a lower constant, , for those computers that dont fail in that initial
period.
(a)

Write down an expression for the survival function S(t) for computers in terms of
and , and sketch a graph of the survival function.
[13]

(b)

Write down the expected length of time a computer will last in terms of and . [11]
[Total 24]

ST338 (2014) CT1

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Continued

3.

State, with reasons, what you can say about the existence of stationary distributions for the
time homogeneous Markov chains shown below. If there will be a unique stationary distribution, state whether the process would tend towards that distribution. Note: arrows are shown
in the diagrams if, and only if, there is a non-zero probability for that transition.

(a)

(b)

[4]

[4]

(c)

[4]
0

(d)
0

(infinite
state
space)
[4]
[Total 16]

ST338 (2014) CT1

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Continued

4.

A pump is being used to drain a flooded area but the pipe regularly gets blocked. If the pipe
gets blocked the pump will be out of action for 10 hours, but the pump will only be out of
action for 4 hours if the pipe is cleaned before it gets blocked. The pump is immediately
restarted at the end of the 10 or 4 hour wait.
Suppose that the time until the pipe gets blocked, measured in hours from the last restart, is
t
an independent random variable with survival probability S(t) = 1 24
.
You decide to proceed in the following way. You start the 10 hour clean/repair as soon as the
pipe gets blocked, but if the pump is still operating u hours after the last restart, you will clean
the pipe anyway. Determine the value of u which minimises, for one restart and clean/repair
cycle,
E[time pump is out of action]
E[time pump is operational before the 10 or 4 hour wait]
[Total 30]

5.

The transition matrix for a Markov chain with states 1, 2 and 3 is:

1/5 2/5
1/20
1/3 2/3
0
If the probability of moving from 1 to 3 in two steps is 1/5, find , and .

END

ST338 (2014) CT1

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[Total 6]

ST338
UNIVERSITY OF WARWICK
CLASS TEST 1: 30 JANUARY 2014
Actuarial Models

1.

(a)

(i)

A process {Xt ,t J} is weakly stationary if E[] and Cov(X , Xt+ ) do not

depend on .

(ii)

It is strictly stationary if joint distributions X+t1 , X+t2 , . . . , X+tn do not depend

on .

(iii)

It has independent increments if X+t X is independent of Xs for all s .

(iv)

It has the Markov property if P{X = y | Fs } = P{X = y | Xs } for s .

[16]

(b)

The expected value is constant: it is zero for both odd and even t.
And the covariance is constant for t 6= 0:
Cov(X , Xt+ ) = E[X Xt+ ] E[X ] E[Xt+ ] = E[X ] E[Xt+ ] E[X ] E[Xt+ ] = 0
And the variance is constant (i.e. when t = 0).
If t is odd:
 
 
Var(X ) = E X2 E[X ]2 = E X2
= (05)2 05 + (-05)2 05 = 025
And if t is even:
 
 
Var(X ) = E X2 E[X ]2 = E X2
= (1)2 0125 + (-1)2 0125 + (0)2 075 = 025
Hence we have shown the process is weakly stationary.
The distribution of X depends on (as it is different for odd and even ) so the
process is not strictly stationary.
[8]
[Total 24]

2.

(a)

(t) =
Z t

 Rt

d = t,
if t 5
Rt

=
5
+
(t

5)
,
if
t >5
=0
=5


Z t
S(t) = exp (t) d
=0

exp{-t} ,
if t 5
=
<7>
exp{-5} exp{-(t 5) } , if t > 5

() d =
=0

ST338 (2014) CT1

, if t 5
, if t > 5
R=0
5

1/4

Continued

1
0

survival probability

100
time (days)

<6>

[13]

(b)
ex =

S() d
=0
Z 5

e- d + e-5
e-(5) d
=0
=5
5



1 -
1 -(5)
-5
+e
- e
= - e

0
5
1
-5
-5 1
= (1 e ) + e
(1 0)

1
1 1
= + ( )e-5 days

[11]
[Total 24]

3.

(a)

Finite state space, not irreducible, so there will be a stationary distribution, but not
necessarily unique. A stationary distribution will be linear combinations of being in
state 0 or state 3.
[4]

(b)

Finite state space, irreducible, but periodic with period 2. So will have unique stationary distribution but wont necessarily tend to it.
[4]

ST338 (2014) CT1

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Continued

4.

(c)

Finite state space, irreducible, aperiodic. So will have unique stationary distribution
and will tend towards it.
[4]

(d)

Infinite state space so may not have a stationary distribution. Can also say it wont
have a stationary distribution, for example by arguing that can never move down,
but positive probability of moving up, so the expected value (ie average state) must
increase with time.
[4]
[Total 16]

u
The probability that the pump is cleaned after u hours is S(u) = 1 24
.

The pdf for the pipe getting blocked after t(< u) hours is

d
dt

F(t) = - ddt S(t) =

1
24 .

The expected time the pump is operational from the last restart is:
Z u
Z u
h 2 iu
t
u
u2
t
u2
tf(t) dt + uS(u) =
= u 48
+ u 24
24 dt + u(1 24 ) = 48
t=0

t=0

The expected time until the next restart is

u
u
u
4S(u) + 10(1 S(u)) = 4(1 24
) + 10 24
= 4 + 6 24
= 4 + u4
So we want to minimise

4 + u4
2

u
u 48

Which is the same as minimising

g(u) =

16 + u
48u u2

We differentiate g(u) and set it to zero:



48u u2 1 [16 + u] [48 2u]
d
g(u) =
2
du
[48u u2 ]




48u u2 768 + 48u 32u 2u2
=
2
[48u u2 ]
u2 + 32u 768
=
2
[48u u2 ]
which will be zero when:
u2 + 32u 768 = 0
which has positive root:

32 + 322 + 4 768
u=
= 16 + 256 + 768 = 16 + 1024 = 16 + 32 = 16
2
Finally we should check that the second derivative is positive, or reason that there must be an
optimal u between the extremes of u = 0 (where it would be silly to clean) and u = 24 (where
it would be better to clean slightly before the definite failure at 24 hours).
Hence the optimum value is u = 16 hours.

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[Total 30]

Continued

5.

First = 25 so that first row sums to 1

Cannot get directly from 3 to 3 so if moved from 1 to 3 in 2 steps, must have taken root 1-1-3
or 1-2-3, and the probabilities of these are 25 25 and 15 .
So 15 = 25 52 + 15 1 = 45 +
So = 15 and hence = 34
[Total 6]

END

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