SOA gives you normal, t and chi-square tables on screen. The formulas that use them are yours to know. These are the ones worth knowing cold, with what each one is for.
AIC (SOA's form)
(RSS + 2dσ̂²) ÷ n
BIC (SOA's form)
(RSS + ln(n)dσ̂²) ÷ n
Adjusted R²
1 − (RSS ÷ (n − p − 1)) ÷ (TSS ÷ (n − 1))
Gini index
Σ p̂(1 − p̂) over the classes in a node
Statistical learning
Expected test MSE at a point = variance of the fit + squared bias + variance of the error.
k-fold cross-validation: the average of the k fold MSEs. Leave-one-out for least squares: (1 ÷ n) Σ ((yᵢ − ŷᵢ) ÷ (1 − hᵢ))².
R² = 1 − RSS ÷ TSS. The residual standard error is √(RSS ÷ (n − p − 1)).
t statistic: estimate ÷ standard error, on n − p − 1 degrees of freedom.
Overall F: ((TSS − RSS) ÷ p) ÷ (RSS ÷ (n − p − 1)). Partial F for q dropped terms: ((RSS₀ − RSS) ÷ q) ÷ (RSS ÷ (n − p − 1)).
A prediction interval adds the error variance to the variance of the fitted mean, so it is always wider than the confidence interval at the same x.
Leverage averages (p + 1) ÷ n. VIF for a predictor = 1 ÷ (1 − R²) from regressing it on the others.
Generalized linear models
Response
Distribution
Canonical link
Binary
Binomial
Logit: ln(p ÷ (1 − p))
Count
Poisson
Log
Positive, skewed
Gamma
Inverse (log is common in practice)
Continuous
Normal
Identity
Using a GLM
Log link: a coefficient b multiplies the mean by e^b for each unit of its predictor. Logit link: it multiplies the odds by e^b.
A Poisson model of counts with exposure E uses ln(E) as an offset: the mean is E × e^(Xβ).
Likelihood ratio test: the drop in deviance between nested models, compared with chi-square on the difference in parameters.
Time series
Random walk: yₜ = yₜ₋₁ + cₜ. With drift μ, the k-step forecast is the last value + kμ, and its variance grows as kσ².
AR(1): yₜ = β₀ + β₁yₜ₋₁ + εₜ, stationary when |β₁| < 1, with mean β₀ ÷ (1 − β₁) and lag-k autocorrelation β₁ᵏ.
Single exponential smoothing: ŝₜ = (1 − w)yₜ + w ŝₜ₋₁; the forecast of every later value is the last smoothed value.
ARCH(1): the conditional variance is ω + αε²ₜ₋₁; GARCH(1, 1) adds βσ²ₜ₋₁, with long-run variance ω ÷ (1 − α − β).
Trees and ensembles
Regression tree: predict the mean of the training responses in the leaf; choose the split that most reduces RSS.
Classification tree: Gini Σ p̂(1 − p̂), entropy −Σ p̂ ln p̂, or error 1 − max p̂, weighted by the share of observations in each child.
Cost complexity pruning: minimize RSS + α × (number of leaves). A larger α gives a smaller tree.
Bagging averages trees grown on bootstrap samples. A random forest considers m of the p predictors at each split, often m ≈ √p.
Boosting fits small trees in sequence, each to the current residuals, shrunk by λ.
Principal components and clustering
Proportion of variance explained by component m: its variance ÷ the sum of all components' variances. prcomp prints standard deviations, so square them first.
A score is the sum of each loading times the matching centered (and scaled) variable.
K-means alternates two steps, assign each point to its nearest centroid and recompute each centroid, until nothing changes. The within-cluster variation never rises.
Linkage: complete uses the largest pairwise distance between clusters, single the smallest, average the mean, centroid the distance between centroids.
Try 4 questions
Question 1
An actuary fits a linear model to the loss cost, in hundreds of dollars, of 48 homeowners policies. The predictors are square footage (sqft, thousands), the age of the home (home_age, years) and region, a factor with four levels (Central, East, North, West) that R enters as three indicator variables with Central as the base level. From summary(fit):
Residual standard error: 1.3854 on 42 degrees of freedom
The total sum of squares of loss cost about its mean is 365.60.
Calculate the F statistic for testing whether all the slope coefficients are zero.
Question 2
An actuary fits a least squares model for the log of annual losses with d = 4 predictors to n = 75 risks; its RSS is 144.35. The model with all 6 candidate predictors gives the error variance estimate σ^2=2.0819.
Calculate BIC for the four-predictor model.
Question 3
An actuary fits an AR(1) model yt=β0+β1yt−1+εt to 40 months of a claim frequency index, by least squares regression of yt on yt−1 (named ylag). The output is below.
No formula sheet is provided. SOA gives normal, t and chi-square tables on screen under an Exhibit button, and you may not bring your own tables.
Which AIC and BIC does Exam SRM use?
SOA's syllabus uses AIC and BIC only for ordinary linear models, in the forms of section 6.1.3 of An Introduction to Statistical Learning: AIC = (RSS + 2dσ̂²) ÷ n and BIC = (RSS + ln(n)dσ̂²) ÷ n.
What is the difference between a confidence and a prediction interval?
A confidence interval is for the mean response at given predictor values. A prediction interval is for one new observation, so it adds the error variance and is always wider.