An actuary is trying to determine the underlying probability that a 70-year-old woman will die
within one year.
The actuary gathers data using a large random sample of 70-year-old women from previous years and identifies how many of them died within one year.
The probability is
estimated by the ratio of the number of deaths in the sample to the total number of 70-year-old
women in the sample. The Central Limit Theorem tells us that if the underlying distribution has a
mean of p and standard deviation of σ then the mean of a large random sample of size n is
approximately normally distributed with mean p and standard deviation
σ
n
. The larger the size
of the sample, the smaller the variation between the sample mean and the underlying value of p .