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370 MG F Problems

The document discusses moment-generating functions (mgfs), defining them for both discrete and continuous random variables and explaining their properties, including how to compute expectations and variances. It also presents practice problems related to mgfs, including calculating expected values and determining the mgf of benefits from insurance policies. Key formulas and concepts, such as the mgf of sums of independent random variables, are highlighted.

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Michael Keane
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30 views2 pages

370 MG F Problems

The document discusses moment-generating functions (mgfs), defining them for both discrete and continuous random variables and explaining their properties, including how to compute expectations and variances. It also presents practice problems related to mgfs, including calculating expected values and determining the mgf of benefits from insurance policies. Key formulas and concepts, such as the mgf of sums of independent random variables, are highlighted.

Uploaded by

Michael Keane
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Math 370, Actuarial Problemsolving

Moment-generating functions

Moment-generating functions

Definitions and properties


General definition of an mgf: M (t) = MX (t) = E(etX ).
P tx
Mgf of discrete r.v.s: M (t) =
e f (x), where f (x) is the p.m.f. of X and the sum is taken
over all values x of X.
R
Mgf of continuous r.v.s: M (t) = etx f (x)dx, where f (x) is the p.d.f. of X, and the range of
integration is the range on which f (x) is defined.
Expectation, variance, and moments via mgf s: M (0) = 1, M 0 (0) = E(X), M 00 (0) = E(X 2 ),
M 000 (0) = E(X 3 ), etc.; Var(X) = M 00 (0) M 0 (0)2 .
Mgf of a multiple of a r.v.: If X has mgf MX (t), and Y = cX with c a constant, then the mgf
of Y is MY (t) = E(etY ) = E(etcX ) = MX (tc).
Mgf of a sum of independent r.v.s X and Y : If X and Y are independent, then X + Y has
mgf MX+Y (t) = MX (t)MY (t). (An analogous formula holds for sums of more than two independent
r.v.s.)

Notes
Note that the product formula for mgfs involves the sum of independent r.v.s, not the product.
The reason behind this is that the definition of the mgf of X + Y is the expectation of et(X+Y ) , which
is equal to the product etX etY . In case of independence, the expectation of that product is the
product of the expectations.
Note that in order to apply mgfs to compute expectations, variances, etc., an mgf only has to be
defined for small values t, since the critical range is that when t is close to 0. In fact, for some
continuous distributions (e.g., exponential) the integral defining an mgf only converges for values t
below certain (positive) bound.

Math 370, Actuarial Problemsolving

Moment-generating functions

Practice Problems
1. (May 2000 Exam, Problem 4-110 of Problemset 4) A company insures homes in three cities, J, K, L.
The losses occurring in these cities are independent. The moment-generating functions for the loss
distributions of the cities are
MJ (t) = (1 2t)3 ,

MK (t) = (1 2t)2.5 ,

ML (t) = (1 2t)4.5

Let X represent the combined losses from the three cities. Calculate E(X 3 ).
2. (August 2007 Exam) A loss for a company has moment-generating function M (t) = 0.16/(0.16 t),
t < 0.16. An insurance policy pays a benefit equal to 70% of the loss. What is the moment-generating
function of the benefit?
3. (Cf. Problem 2.5.21 in Hogg/Tanis) Given that X has moment-generating function
1
1
1
1
M (t) = e2t + et + et + e2t ,
6
3
4
4
find P (|X| 1).
4. (May 2007 Exam) Suppose that M (t) is a moment-generating function of some random variable.
Which of the following are moment-generating functions of some (other) random variables?
(i) M (t)M (5t); (ii) 2M (t); (iii) et M (t).

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