17-05-10 - UF-ESI-632117-05-10.xmcdpage 1 of 217.5.10Payoff...

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Unformatted text preview: UF-ESI-632117-05-10.xmcdpage 1 of 217.5.10Payoff Insurance Company charges a customer according to his or her accident history.(Hint:In case of difficulty, try a four-state Markov chain.)A customer who had no accident last year has a 3% chance of having an accident during the current year. A customer who had an accident last year has a 10% chance of having an accident during the current year.Create a transition matrix consisting of four two-digit binary states in its state space:{00, 01, 10, 11}where for rows00 = no accident two years ago and no accident one year ago01 = no accident two years ago and accident one year ago10 = accident two years ago and no accident one year ago11 = accident two years ago and accident one year agoand for columns00 = no accident one year ago and no accident zero years ago01 = no accident one year ago and accident zero years ago10 = accident one year ago and no accident zero years ago11 = accident one year ago and accident zero years agoSo given that each row must sum to one, it becomes clear that a "customer who had no accident...
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17-05-10 - UF-ESI-632117-05-10.xmcdpage 1 of 217.5.10Payoff...

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