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CS/APR2011/ASC486
COURSE
COURSE CODE
ASC486
EXAMINATION
APRIL 2011
TIME
3 HOURS
INSTRUCTIONS TO CANDIDATES
1.
2.
Answer ALL questions in the Answer Booklet. Start each answer on a new page.
3.
Do not bring any material into the examination room unless permission is granted by the
invigilator.
4.
Please check to make sure that this examination pack consists of:
i)
ii)
iii)
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CS/APR2011/ASC486
QUESTION 1
A Markov chain {Xn} has the following transition probability matrix:
0
1
2
3
a)
0
0.4
0
0
0
0.3
0.6
0
0
1 2
0.2
0.3
0.8
0
3
0.1
0.1
0.2 '
1
Compute P{X0 = 0,X1 = 1,X2 = 2} and ?{Xt = 1,X2 = 1\X0 = 0}, given the initial
distribution p0 - 0.3, p = 0.3, and p2 = 0.3.
(5 marks)
b)
If it is known that the process starts in state 1, determine P{X0 - l,Xt = Q,X2 = 2} and
P{X2 = 2}.
(5 marks)
c)
d)
What is the probability that the Markov chain is absorbed in state 3 if it starts in state
1? Also, compute the mean time to absorption.
(5 marks)
QUESTION 2
A health insurance scheme classifies its members into contributors and beneficiaries. A
contributor in one period becomes a beneficiary in the next period if he or she becomes ill.
This happens with a probability of 0.1. The probability of an illness continuing into the next
period is 0.2. The scheme specifies that any member who is a beneficiary for three
successive periods must become a contributor for the next period; if the illness still persists
the member may thereafter revert to being a beneficiary.
State
a)
Description
Healthy contributer
Model the scheme as a discrete time Markov chain with the above states and show
that the transition probability matrix of the chain is as follows:
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CS/APR2011/ASC486
0.9
0.1
0.8
0.2
P = 0.8
0.8
0.2
0.2
0.8 0.2
(6 marks)
b)
c)
d)
Let b be the average gross payout per beneficiary and c the average gross payout per
contributor per period; this means that the net payments are (b-f)
and
(c-f)
respectively, where f is the membership fee per period (assumed to be uniform over
members and over time).
(3 marks)
e)
Calculate the average profit per period per member in the stationary regime if b = 600,
c = 150 and f = 300.
(3 marks)
QUESTION 3
A restaurant receives table reservations throughout the day, beginning at 10am. The
reservations are modeled as a Poisson process of rate 6 per hour. Each reservation is for a
table for one, with probability 0.1, a table for two, with probability 0.4, a table for three or
four, with probability 0.2, a table for five or more, with probability 0.3, independently of its
arrival time. Find the probabilities that:
a)
b)
At least one table for three or more has been reserved by 11 am.
(5 marks)
c)
(5 marks)
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d)
CS/APR2011/ASC486
The total number of prospective diners with places reserved by 1 pm is less than 3.
(5 marks)
QUESTION 4
In an econometric model, three economic time series, X, Yand Z, are related to one another
by the equations
Xl=Xl_l+aZi_l+eu
Z, = y Z M + 3 ,
where a , p and y each lies in the interval (-1, +1) and the e are uncorrelated and have
mean zero. State, with reasons:
a)
b)
c)
QUESTION 5
a)
A model frequently used for interest rates is an Ito process X, satisfying the stochastic
differential equation
dX, = a(b - Xt )dt + a-^X~tdBt
where Bt is a standard Brownian motion.
i)
equation L = a{b m 7 ).
(8 marks)
ii) Solve the equation to determine m,(t) for all t > 0.
(7 marks)
Hak Cipta Universiti Teknologi MARA
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b)
CS/APR 2011/ASC486
Suppose you invest $1000 in a stock. Find the probability that you gain after 1yr (260
business days) assuming that the stock market is modeled as a Geometric Brownian
motion with average daily return of 0.05% and standard deviation of 1.02%.
(10 marks)
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