Financial Risk Manager Part 1

Explanation

This is a Bayes' theorem problem where we need to find the conditional probability that a client who died was in the age group 66-99 years.

Given Information:

• Age groups and their probabilities:

  • 16-20 years: P(B₁) = 0.10
  • 21-30 years: P(B₂) = 0.29
  • 31-65 years: P(B₃) = 0.49
  • 66-99 years: P(B₄) = 0.12

• Death probabilities for each age group:

  • P(D|B₁) = 0.04
  • P(D|B₂) = 0.05
  • P(D|B₃) = 0.10
  • P(D|B₄) = 0.14

Solution using Bayes' Theorem:

We want P(B₄|D) = Probability that the client was in age group 66-99 given that they died.

According to Bayes' theorem:

P(B₄|D) = [P(B₄) × P(D|B₄)] / [P(B₁) × P(D|B₁) + P(B₂) × P(D|B₂) + P(B₃) × P(D|B₃) + P(B₄) × P(D|B₄)]

Calculation:

Numerator: P(B₄) × P(D|B₄) = 0.12 × 0.14 = 0.0168

Denominator:

• P(B₁) × P(D|B₁) = 0.10 × 0.04 = 0.0040
• P(B₂) × P(D|B₂) = 0.29 × 0.05 = 0.0145
• P(B₃) × P(D|B₃) = 0.49 × 0.10 = 0.0490
• P(B₄) × P(D|B₄) = 0.12 × 0.14 = 0.0168

Total denominator = 0.0040 + 0.0145 + 0.0490 + 0.0168 = 0.0843

P(B₄|D) = 0.0168 / 0.0843 = 0.1993 ≈ 0.201

Alternative approach from the provided solution:

The solution shows calculating other probabilities first:

• P(B₁|D) = 0.04745 ≈ 4.7%
• P(B₂|D) = 0.172 ≈ 17.2%
• P(B₃|D) = 0.049 / 0.0843 ≈ 0.581 ≈ 58.1%

Since all probabilities must sum to 1: P(B₄|D) = 1 - (0.047 + 0.172 + 0.581) = 1 - 0.8 = 0.2 ≈ 0.201

Thus, the correct answer is D. 0.201.