Original practice · fully worked
Original variant: variance of a threshold-triggered payment
The number N of system alerts in a week is Poisson with mean 2. A maintenance contract pays 100 credits if at least two alerts occur and pays nothing otherwise. Calculate the variance of the weekly payment, in squared credits.
- A
0.594 - B
59.399 - C
100.000 - D
2411.651 - E
5939.942
Answer and calculation
A payment occurs with probability 1-3 exp(−2)=0.593994. The payment is 100 times a Bernoulli indicator, so its variance is 100 squared times p(1-p)=2411.651, choice D.
Setup
Setup
Represent the payment by an indicator for crossing the alert threshold.
N∼Poisson(2) Y=1001{N≥2} Model
Model
Evaluate the Bernoulli success probability for the payment indicator.
p=Pr(N≥2)=1−Pr(N=0)−Pr(N=1) p=1−3e−2=0.5939942 Compute
Compute
Scale the Bernoulli variance by the square of the payment amount.
Var(Y)=1002p(1−p) Var(Y)=10000(0.5939942)(0.4060058)=2411.6510 Answer
Answer
The weekly payment variance is approximately 2411.651 squared credits.
2411.651(D)