Math 370, Spring 2008

Prof. A.J. Hildebrand

Practice Test 2
About this test. This is a practice test made up of a random collection of 15 problems
from past Course 1/P actuarial exams. Most of the problems have appeared on the Actuarial
Problem sets passed out in class, but I have also included some additional problems.
Topics covered. This test covers the topics of Chapters 1–5 in Hogg/Tanis and Actuarial
Problem Sets 1–5.
Ordering of the problems. In order to mimick the conditions of the actual exam as closely
as possible, the problems are in no particular order. Easy problems are mixed in with hard ones.
In fact, I used a program to select the problems and to put them in random order, with no
human intervention. If you find the problems hard, it’s the luck of the draw!
Suggestions on taking the test. Try to take this test as if it were the real thing. Take it
as a closed books, notes, etc., time yourself, and stop after 2 hours. In the actuarial exam you
have 3 hours for 30 problems, so 2 is an appropriate time limit for a 20 problem test.
Answers/solutions. Answers and solutions will be posted on the course webpage, www.
math.uiuc.edu/∼hildebr/370.

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Math 370 Spring 2008 Practice Test 2

1. Let X and Y denote the values of two stocks at the end of a five-year period. X is uniformly
distributed on the interval (0, 12). Given X = x, Y is uniformly distributed on the interval
(0, x). Determine Cov(X, Y ) according to this model.

(A) 0 (B) 4 (C) 6 (D) 12 (E) 24

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Math 370 Spring 2008 Practice Test 2

2. A device contains two circuits. The second circuit is a backup for the first, so the second is
used only when the first has failed. The device fails when and only when the second circuit
fails. Let X and Y be the times at which the first and second circuits fail, respectively. X
and Y have joint probability density function
(
6e−x e−2y for 0 < x < y < ∞,
f (x, y) =
0 otherwise.

What is the expected time at which the device fails?

(A) 0.33 (B) 0.50 (C) 0.67 (D) 0.83 (E) 1.50

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Math 370 Spring 2008 Practice Test 2

3. An actuary has discovered that policyholders are three times as likely to file two claims
as to file four claims. If the number of claims filed has a Poisson distribution, what is the
variance of the number of claims filed?
√ √
(A) 1/ 3 (B) 1 (C) 2 (D) 2 (E) 4

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Math 370 Spring 2008 Practice Test 2

4. An insurance company examines its pool of auto insurance customers and gathers the
following information:

(i) All customers insure at least one car.

(ii) 70% of the customers insure more than one car.
(iii) 20% of the customers insure a sports car.
(iv) Of those customers who insure more than one car, 15% insure a sports car.

Calculate the probability that a randomly selected customer insures exactly one car and
that car is not a sports car.

(A) 0.13 (B) 0.21 (C) 0.24 (D) 0.25 (E) 0.30

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Math 370 Spring 2008 Practice Test 2

5. A device that continuously measures and records seismic activity is placed in a remote
region. The time, T , to failure of this device is exponentially distributed with mean 3
years. Since the device will not be monitored during its first two years of service, the time
to discovery of its failure is X = max(T, 2). Determine E(X).

(A) 2 + 13 e−6
(B) 2 − 2e−2/3 + 5e−4/3
(C) 3
(D) 2 + 3e−2/3
(E) 5

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Math 370 Spring 2008 Practice Test 2

6. A car dealership sells 0, 1, or 2 luxury cars on any day. When selling a car, the dealer also
tries to persuade the customer to buy an extended warranty for the car. Let X denote
the number of luxury cars sold in a given day, and let Y denote the number of extended
warranties sold, and suppose that


 1/6 for (x, y) = (0, 0),

1/12 for (x, y) = (1, 0),





1/6 for (x, y) = (1, 1),
P (X = x, Y = y) =
1/12 for (x, y) = (2, 0),


1/3 for (x, y) = (2, 1),





1/6 for (x, y) = (2, 2).


What is the variance of X?

(A) 0.47 (B) 0.58 (C) 0.83 (D) 1.42 (E) 2.58

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Math 370 Spring 2008 Practice Test 2

7. A company prices its hurricane insurance using the following assumptions:

(i) In any calendar year, there can be at most one hurricane.

(ii) In any calendar year, the probability of a hurricane is 0.05.
(iii) The number of hurricanes in any calendar year is independent of the number of
hurricanes in any other calendar year.

Using the company’s assumptions, calculate the probability that there are fewer than 3
hurricanes in a 20-year period.

(A) 0.06 (B) 0.19 (C) 0.38 (D) 0.62 (E) 0.92

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Math 370 Spring 2008 Practice Test 2

8. The loss due to a fire in a commercial building is modeled by a random variable X with
density function (
0.005(20 − x) for 0 < x < 20,
f (x) =
0 otherwise.
Given that a fire loss exceeds 8, what is the probability that it exceeds 16?

(A) 1/25 (B) 1/9 (C) 1/8 (D) 1/3 (E) 3/7

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Math 370 Spring 2008 Practice Test 2

9. A large pool of adults earning their first driver’s license includes 50% low-risk drivers,
30% moderate-risk drivers, and 20% high-risk drivers. Because these drivers have no prior
driving record, an insurance company considers each driver to be randomly selected from
the pool. This month, the insurance company writes 4 new policies for adults earning their
first driver’s license. What is the probability that these 4 will contain at least two more
high-risk drivers than low-risk drivers?

(A) 0.006 (B) 0.012 (C) 0.018 (D) 0.049 (E) 0.073

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Math 370 Spring 2008 Practice Test 2

10. An insurance company determines that N , the number of claims received in a week, is a
random variable with P (N = n) = 2−n−1 , where n ≥ 0. The company also determines
that the number of claims received in a given week is independent of the number of claims
received in any other week. Determine the probability that exactly seven claims will be
received during a given two-week period.

1 1 7 1 1
(A) 256 (B) 128 (C) 512 (D) 64 (E) 32

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Math 370 Spring 2008 Practice Test 2

11. A device contains two components. The device fails if either component fails. The joint
density function of the lifetimes of the components, measured in hours, is f (s, t), where
0 < s < 1 and 0 < t < 1. What is the probability that the device fails during the first half
hour of operation?
Z 0.5 Z 0.5
(A) f (s, t)dsdt
0 0
Z 1 Z 0.5
(B) f (s, t)dsdt
0 0
Z 1 Z 1
(C) f (s, t)dsdt
0.5 0.5
Z 0.5 Z 1 Z 1 Z 0.5
(D) f (s, t)dsdt + f (s, t)dsdt
0 0 0 0
Z 0.5 Z 1 Z 1 Z 0.5
(E) f (s, t)dsdt + f (s, t)dsdt
0 0.5 0 0

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Math 370 Spring 2008 Practice Test 2

12. The time to failure of a component in an electronic device has an exponential distribution
with a median of four hours. Calculate the probability that the component will work
without failing for at least five hours.

(A) 0.07 (B) 0.29 (C) 0.38 (D) 0.42 (E) 0.57

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Math 370 Spring 2008 Practice Test 2

13. A health study tracked a group of persons for five years. At the beginning of the study,
20% were classified as heavy smokers, 30% as light smokers, and 50% as nonsmokers.
Results of the study showed that light smokers were twice as likely as nonsmokers to die
during the five-year study, but only half as likely as heavy smokers. A randomly selected
participant from the study died over the five-year period. Calculate the probability that
the participant was a heavy smoker.

(A) 0.20 (B) 0.25 (C) 0.35 (D) 0.42 (E) 0.57

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Math 370 Spring 2008 Practice Test 2

14. The stock prices of two companies at the end of any given year are modeled with random
variables X and Y that follow a distribution with joint density function
(
2x for 0 < x < 1, x < y < x + 1,
f (x, y) =
0 otherwise.

What is the conditional variance of Y given that X = x ?

(A) 1/12 (B) 7/6 (C) x + 1/2 (D) x2 − 1/6 (E) x2 + x + 1/3

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Math 370 Spring 2008 Practice Test 2

15. An insurance company sells an auto insurance policy that covers losses incurred by a poli-
cyholder, subject to a deductible of 100. Losses incurred follow an exponential distribution
with mean 300. What is the 95th percentile of actual losses that exceed the deductible?

(A) 600 (B) 700 (C) 800 (D) 900 (E) 1000

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Math 370 Spring 2008 Practice Test 2

16. An insurance company insures a large number of drivers. Let X be the random vari-
able representing the company’s losses under collision insurance, and let Y represent the
company’s losses under liability insurance. X and Y have joint density function
(
1
(2x + 2 − y) for 0 < x < 1 and 0 < y < 2,
f (x, y) = 4
0 otherwise.

What is the probability that the total loss is at least 1?

(A) 0.33 (B) 0.38 (C) 0.41 (D) 0.71 (E) 0.75

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Math 370 Spring 2008 Practice Test 2

17. An insurance company sells a one-year automobile policy with a deductible of 2. The
probability that the insured will incur a loss is 0.05. If there is a loss, the probability of a
loss of amount N is K/N , for N = 1, . . . , 5 and K a constant. These are the only possible
loss amounts and no more than one loss can occur. Determine the net premium for this
policy.

(A) 0.031 (B) 0.066 (C) 0.072 (D) 0.110 (E) 0.150

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Math 370 Spring 2008 Practice Test 2

18. An insurance policy pays a total medical benefit consisting of a part paid to the surgeon,
X, and a part paid to the hospital, Y , so that the total benefit is X + Y . It is known that
Var(X) = 5, 000, Var(Y ) = 10, 000, and Var(X + Y ) = 17, 000. Due to increasing medical
costs, the company that issues the policy decides to increase X by a flat amount of 100
per claim and to increase Y by 10% per claim. Calculate the variance of the total benefit
after these revisions have been made.

(A) 18, 200 (B) 18, 800 (C) 19, 300 (D) 19, 520 (E) 20, 670

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Math 370 Spring 2008 Practice Test 2

19. Let T1 be the time between a car accident and reporting a claim to the insurance company.
Let T2 be the time between the report of the claim and payment of the claim. The joint
density function of T1 and T2 , f (t1 , t2 ), is constant over the region 0 < t1 < 6, 0 < t2 <
6, 0 < t1 + t2 < 10, and zero otherwise. Determine E(T1 + T2 ), the expected time between
a car accident and payment of the claim.

(A) 4.9 (B) 5.0 (C) 5.7 (D) 6.0 (E) 6.7

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Math 370 Spring 2008 Practice Test 2

20. A company agrees to accept the highest of four sealed bids on a property. The four bids
are regarded as four independent random variables with common cumulative distribution
function
1
F (x) = (1 + sin πx) for 3/2 ≤ x ≤ 5/2.
2
Which of the following represents the expected value of the accepted bid?
Z 5/2
(A) π x cos πxdx
3/2
Z 5/2
1
(B) (1 + sin πx)4 dx
16 3/2
5/2Z
1
(C) x(1 + sin πx)4 dx
16 3/2
π 5/2
Z
(D) (cos πx)(1 + sin πx)3 dx
4 3/2
π 5/2
Z
(E) x(cos πx)(1 + sin πx)3 dx
4 3/2

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