This Exam P sample reference tests Uniform Distribution. For payment Y=(X-d)_+ with a uniform unit loss, E[Y]=(1-d)²⁄². The stated mean gives 1-d=0.70. Then E[Y²]=(0.70)³⁄³ and Var(Y)=0.0543083, which rounds to choice B.
These notes identify the calculation error associated with each wrong letter when that error is reproducible.
AThis is approximately P(Y>0)² Var(Y|Y>0)=0.70²(0.70²⁄¹²). That scales only the within-positive variance and omits the mixture between zero and positive payments.
CThis is close to the squared mean (0.245)²=0.060025. A squared mean is the term subtracted from the second moment, not the variance itself.
DThis is the original loss variance 1/12=0.083333. The deductible changes the payment distribution and introduces an atom at zero.
EThis reports the second moment E[Y²]=0.114333 before subtracting (E[Y])².
Original practice · fully worked
Original variant: variance of a capped warranty layer
A warranty loss L is uniformly distributed from 0 to 12 hundred dollars. The warranty pays the portion of a loss above 4 hundred dollars, but pays no more than 4 hundred dollars. Let Z be the payment in hundreds of dollars. Calculate Var(Z).
A 16/9
B 2
C 28/9
D 4
E 64/9
Variant answer in brief
The payment is zero below 4, rises linearly from 0 to 4 for losses between 4 and 8, and equals 4 above 8. These pieces give E[Z]=2 and E[Z²]=64/9, so Var(Z)=28/9 and choice C.
Setup
Setup
Write the capped layer payment in its three loss regions.
Z=0(0≤L≤4)
Z=L−4(4<L<8)
Z=4(8≤L≤12)
Model
Model
The loss density is 1/12. Integrate the increasing layer and add the point contribution from the capped region.
E[Z]=121∫48(l−4)dl+4(124)
E[Z2]=121∫48(l−4)2dl+16(124)
Compute
Compute
Evaluate the two moments and subtract the squared mean.
E[Z]=32+34=2
E[Z2]=916+316=964
Var(Z)=964−22=928
Answer
Answer
The payment variance is 28/9 in squared hundreds of dollars.
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