ACTL2102 Final Exam PASS Session Review

ACTL2102 Final Exam PASS Session
October 30, 2014
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Plan
1 Lectures 1-2: Stochastic Processes and Discrete Time Markov Chains

Stuff You Should Know
Example Questions
2 Lecture 3: Exponential Distribution and the Poisson Process
Example Questions
3 Lectures 4-5: Continuous Time Markov Chains
Example Questions
4 Lectures 6-8: Time Series Mathematics
Example Questions
5 Lectures 8-10: Model Selection, Checking, and Prediction
Example Questions
6 Lectures 11-12: Pseudo-Random Continuous Walks
Example Questions
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Lectures 1-2: Stochastic Processes and Discrete Time Markov Chains

Definitions:
Independent Increments
Stationary Increments
Markov Process
Transition Matrices
State Classifications
Mean Time in Transient States
Periodicity
Limiting Probabilities and their Conditions
Time Reversibility
Gamblers Ruin
Branching Processes
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Example Questions
PASS 3-4 (modified)
Specify the classes of the following Markov chain, and determine

for each class whether they are transient or recurrent:
1 2
3
3 0 0
1 0 1 0
2
1 2
0 0 1 3
4
4
0 0 12 12
2 Find the probability that the process will return to state 4
eventually if the process starts at state 4.
3
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Find the expected number of times state 4 is visited if the

process starts at state 4.

Example Questions
Tutorial 2-2
An unfeasibly large organisation has N employees. Each employee
has one one of three possible job classifications and changes
classification (independently) according to a Markov chain with
transition probabilities.
0.7 0.2 0.1

0.2 0.6 0.2
0.1 0.4 0.5
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What percentage of employees are in each classification?
Is this process time-reversible?

Example Questions
PASS 4-4
For the following branching process, calculate the probability of

extinction when the number Y of offspring of each individual
follows the following distribution:
1
P(Y = 0) = 31 , P(Y = 1) = 12 , P(Y = 2) =
Y Bin(2, 0.6)
1
6
For both questions, assume the starting population X0 = 1
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Example Questions
PASS 4-6
Han Solo moves among n + 1 star systems that are arranged in a

circle. At each system it moves either to the next system in the
clockwise direction with probability p or the counterclockwise
direction with probability q = 1 p. Starting at a specified
system, call it system 0, find the probability that all star systems
have been visited before revisiting system 0.
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Lecture 3: Exponential Distribution and the Poisson Process
Exponential Distribution: Properties and Results

Definition of Counting and Poisson Process
Interarrival and Waiting Times
Sum and Thinning of Poisson Process
Non-Homogenous and Compound Poisson
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Example Questions
PASS 5-3
The average number of automobiles entering a mountain tunnel
per minute period is 1. Excessive number of cars entering the
tunnel during a brief period of time produces a hazardous
situation. Assuming the Poisson process:
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Find the probability that the number of automobiles entering

the tunnel during a 1 minute period exceeds 2?
What is the probability that the number of automobiles

entering the tunnel will be less than 3 during a 3-minute
period?
What is the probability that no car enters the tunnel during

the first 4 minutes?

Example Questions
PASS 5-6
An insurance portfolio contains policies for three categories of
policyholder: A, B and C. The number of claims in a year, N, on
an individual policy follows a Poisson distribution with mean .
Individual claim sizes are assumed to be exponentially distributed
with mean 4 and are independent from claim to claim. The
distribution of , depending on the category of the policyholder, is:
Category
A
B
C
Value of
2
3
4
Proportion of policyholders
20%
60%
20%
Denote by S the total amount claimed by a policyholder in one

year.
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Example Questions
PASS 5-6 continued
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Prove that E (S) = E [E (S|)].
Show that E (S|) = 4 and Var (S|) = 32.
Calculate E (S).
Calculate Var (S).

Example Questions
Tutorial 3-6
Events occur according to a nonhomogenoous Poisson process

whose mean value function is given by
m(t) = t 2 + 2t,
t0
What is the probability that n events occur between time t = 4

and t = 5?
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Example Questions
Tutorial 3-9
Insurer A has a combined home insurance and landlords insurance
portfolio. The total number of claims for this portfolio is modelled
using a Poisson process with expected claims 300 per year. The
proportion of landlords insurance claims was 1/5 of the overall
claims. Insurer A sells its home insurance portfolio to insurer B.
Insurer B specialises in home insurance and has no landlords
insurance policies. The expected number of claims for the old
portfolio of insurer B was 120.
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Define the processes of the number of claims from insurer A

for both the home insurance portfolio and landlords insurance
portfolio before the takeover.
Define the processes of the number of claims of both insurer

A and insurer B before and after the takeover of the home
insurance by insurer B.

Lectures 4-5: Continuous Time Markov Chains
Definitions and First Principles

The Q (Generator) Matrix and the embedded Markov Chain
Kolmogorov Equations and the P(s,t) transition matrix
Limiting Probabilities
Time Reversibility
Birth-Death Processes (rates, structure, mean time,
Kolmogorov equations, balance equations)
HSD models, and computing probabilities using integrals
(Maybe) Calculation methods
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Example Questions
PASS 6-1
A 24 hour convenience store has three cashiers, Ralph, Vincent,
Benjamin. Customers arrive according to a Poisson process with
rate per hour and join the queue if there are already 3 customers
served. Each cashier serves customers with service times
exponential with mean 1 per hour.
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Define a Markov chain to model the number of customers in

the store and write down the corresponding generator matrix
(the instantaneous transition rate matrix).
Given that there is n (n > 3) customers in the store, determine

an expression for the conditional probability that the number
of customers will remain unchanged over the next 15 minutes.

Example Questions
PASS 6-5 (modified)

Consider the following probability transition rate matrix with state
1, 2, 3, 4:
0.7 0.4 0.3

0
0.1 1 0.3
0.6
Q=
0.1 1.9 2.2 0.2
1.7 0.3 0.5 2.5
1
2
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Find the embedded probability matrix.

Find the probability that the fifteen transition will be into
state 3, given we started in state 1 and the thirteenth
transition was into state 2.
If possible, find the long-run proportion of time spent in each
state.
Is this process time-reversible?

Example Questions
PASS 7-1
Consider the birth and death process with i = for i = 0, 1, 2, ...

and j = for j = 1, 2, 3, .... Denote Ti as the time spent in state
i before moving to state i + 1. Find E[Ti ].
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Example Questions
PASS 7-7
Consider a health (H), sickness (S) and death (D) model for an
individual aged x > 0 with the following rates:
The rate at which a healthy individual becomes sick is 0.001x
The rate at which a sick individual recovers is 0.002x
The rate at which a healthy individual dies is 0.001x
The rate at which a sick individual dies is 0.002x
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Give an expression for the probability that a sick 65 year old

individual stays sick for at least 1 year and then becomes
healthy and remain so till age 67.
Find the probability that a sick 65 year old individual remains

sick until he dies.

Example Questions
Tutorial 5-1 (modified)
Consider two machines both with an exponential lifetime 1/.
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There is a single repairdrone that can service machines at a

rate . Set up the Kolmogorov backward equations. Also, set
up the forward equations.
Consider instead the case where the inevitable automation of

all our jobs has not yet occurred and the repairdrone is
instead a repairhuman. This repairhuman repairs at a rate
(t), where t is the time since breakfast. Set up the
Kolmogorov backward and forward equations.

Lectures 6-8: Time Series Mathematics
Classical decomposition model

Removing deterministic seasonality and deterministic trends
Integrated Time Series
SARIMA models (and their subsets)
Causality and Invertibility
Calculating ACF:
Linear Filter Method
Yule-Walker Equations
Calculating PACF
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Example Questions
PASS 8-1
Find a filter of the form 1 + B + B 2 + B 3 that passes linear

trends without distortion and that eliminates arbitrary seasonal
components of period 2.
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Example Questions
PASS 10-6
Compute the ACF and the PACF for the following AR(2) process
Xt = 0.6Xt1 + 0.2Xt2 + Zt where Zt W .N(0, 2 ).
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Example Questions
Tutorial 8-3
Consider the AR(2) process {Xt } satisfying:

Xt Xt1 2 Xt2 = Zt
For what values of is this a causal process?
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Example Questions
UKCT6 10/07-10 (modified)

The time series Xt is assumed to be stationary and to follow an
ARMA(2,1) process defined by:
Xt = 1 +
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1
1
8
Xt1 Xt2 + Zt Zt1
15
15
7
Determine the roots of the characteristic polynomial, and

explain how their values relate to the stationarity of the
process.
Find the ACF for lags 0, 1, and 2.
Determine the mean and variance of Xt .

Lectures 8-10: Model Selection, Checking, and Prediction

Model selection
Looking at pictures
AIC, BIC (AKA SBC), AICc
Model parameter estimation (finding and using SACF and

SPACF)
Residual Analysis: Portmanteau/Ljung-Box
Testing for non-stationarity
Looking at the diagram
Dickey-Fuller and Augmented Dickey-Fuller tests
Cointegrated Time Series

Markov Property
Forecasting
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Box-Jenkins
Best Linear Predictor

Example Questions
Mock Exam Q6 & Q7
No. I cant be bothered typing them out. Just... open the .pdf for
yourself.
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Example Questions
PASS 12-5
Consider the following 2 time series:

Xt = 2t 2 + 3 + Zt
Yt = 3(t 1)2 + Zt
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We say that (Xt , Yt ) are integrated of order d. Find d.
Are Xt and Yt cointegrated? If so, give the cointegration

vector. If not, give reasons why not.

Example Questions
Tutorial 10-2 (Modified)
Explain briefly whether the following processes are Markov:
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AR(4)
ARMA (1,1)

Example Questions
Suppose {Xt } is a stationary time series with mean and ACF

(.). Find the best linear predictor of Xn+h of the form aXn + b.
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Example Questions
Consider an ARIMA(1,1,1) model.
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Use the Box-Jenkins apporach to derive the one-step and

two-step ahead forecasts, assuming the parameter values are
known.
Evaluate the prediction variance Var( Xn+1 xn (1)), assuming

the parameter values are known.

Lectures 11-12: Pseudo-Random Continuous Walks

Definitions of Brownian Motion
Properties of Brownian Motion
Stochastic Differential Equations (!)
Stochastic Integrals (!)
Monte Carlo Simulation
Linear Congruential Formula
Inverse-Transform (Discrete and Continuous)
Accept-Reject (Discrete and Continuous)
Variance Reduction Techniques
Importance Sampling
Number of Simulations
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Example Questions
Lecture 11-30
Evaulate E[Bt8 ], where Bt is standard Brownian Motion.
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Example Questions
Bonus Question
Consider the geometric Brownian Motion

Y (t) = exp(t + Xt )
where Xt has the stochastic differential equation
dXt = dt + dBt
and where Bt is standard Brownian motion.
Express dYt as a stochastic differential equation.
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Example Questions
Another Bonus Question
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Consider the linear congruential formula. Where a = 11,

c = 37, m = 100 and x0 = 85, generate 3 random numbers
on U[0, 1].
Use these numbers to generate samplings from a Bin(3, 0.5)

and an exponential distribution with mean 0.5.
If possible, use the exponential random variable samples

obtained to generate samplings from a Gamma(2, 3) random
variable. Use the Acceptance-Rejection method.

Example Questions
PASS 13-5
Suppose you are simulating a set or normally distributed random

variables with mean 65 and standard deviation 15. Find the
number of simulations required so that you will be in a 0.5% band
of the true value, 95% of the time.
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Example Questions
Lazy Questions:
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Explain how using antithetical variates reduces estimate

variance.
Explain how using control variates reduces estimate variance.
Explain how importance sampling can increase computational

efficiency for determining expectations.

Example Questions
WERE DONE HERE!
GOOD LUCK!
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ACTL2102 Final Exam PASS Session Review

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ACTL2102 Final Exam PASS Session