39EG4395 Stochastic Modeling & Risk Analysis

Handout – Review of Sets

Dr. Easwaran

1. Sets

A set is a well-defined collection of distinct objects. These objects are called

elements or members of the set. For example, a set can represent all
suppliers who deliver within 3 days. For another example, a set might include
all insurance policyholders under age 30.

Sets can be represented in different ways depending on the context and the
clarity needed. Two common methods are Roster Form and Set-Builder
Form:

 Roster Form is the most direct and visual way to represent a set. In
this method, all the elements of the set are listed explicitly, separated
by commas, and enclosed within curly braces {}. This form is
especially useful when the set has a small number of elements or when
the elements are easily identifiable. For example, consider the set of
even numbers less than 10. In roster form, this set is written as: A =
{2, 4, 6, 8}. This representation is clear and intuitive. In practical
applications, such as logistics, a roster form might be used to list
delivery hubs, for instance, H = {San Antonio, Dallas, Houston,
Austin}.
 The Set-Builder Form is more abstract and powerful, especially when
dealing with large or infinite sets. Instead of listing each individual
element, this form describes the properties that define the elements of
the set. It uses a variable (commonly x) and a condition that x must
satisfy. For example, the same set A containing even numbers less
than 10 can be written as A = {x: x is an even number less than
10}. This form is particularly useful in fields like actuarial science,
where sets are defined by conditions such as age or risk level: P = {x:
x is a policyholder under age 30 with no claims}.

2. Types of Sets

Understanding the nature of a set is crucial in both theoretical and applied

contexts. Sets can be classified based on the number and nature of their
elements.
 elements. It is denoted by the symbol ∅ or {}. This concept is
 Empty Set (∅): An empty set, also called a null set, contains no

important in scenarios where a condition yields no results. For

example, A = {x: x is a natural number between 1 and 2}. Since there
are no natural numbers strictly between 1 and 2, A is an empty set. In
risk management, an empty set might represent assets that are both
high-yield and zero-risk—an unrealistic combination.
 Finite Set: A finite set contains a finite number of elements. These
sets are easy to manage and analyze. For example, B = {1, 2, 3, 4}. In
supply chain analysis, a finite set could represent the number of
suppliers in a region: S = {Supplier A, Supplier B, Supplier C}.
 Infinite Set: An infinite set may contain either non-finite countable
or uncountable number of elements. These sets cannot be listed
completely but can be described using patterns or rules. For example,
N = {1, 2, 3, …} — the set of all natural numbers contains
countably infinite number of elements. For another example, in
logistics, an uncountable set might represent the infinitely precise
temperature measurement within a storage freezer that can vary
continuously.
 Universal Set: This is the set that contains all elements under
consideration in a particular context. It acts as the "universe" from
which subsets are drawn and is essential for defining complements and
performing set operations. In an insurance company, the universal set
might represent all policyholders. In logistics, the universal set could
be all delivery routes.
 Subset: This is a set whose elements are all contained within another

say that A is a subset of B, written as A ⊆ B. If set B has more

set. If every element of set A is also an element of another set B, we

elements than set A, then A is a proper subset of B, written as A ⊂

B. This concept is foundational in understanding relationships between
groups of data or entities. Imagine a financial institution analyzing its
portfolio. Let B be the set of all financial assets it holds. Now, let A be

financial asset, we can say that A ⊂ B. This helps risk managers isolate
the set of assets with high volatility. Since every volatile asset is also a

and monitor specific categories of assets within a broader portfolio. For

another example, in supply chain analytics consider a subset of
suppliers who meet both delivery and quality standards within the
larger set of all suppliers.
 Standard sets: These serve as building blocks for more complex
concepts. These sets are not only essential in theory but also play a
vital role in real-world applications across disciplines like logistics,
finance, and insurance.
o Natural Numbers (N): The set of counting numbers, starting
from 1 and increasing indefinitely with an increment of 1: N =
{1, 2, 3, 4, 5, …}. Natural numbers are used to count discrete
items such as number of units in inventory, number of orders
placed, number of deliveries completed, number of claims filed,
number of policies sold, and number of years a policy has been
active. These counts are fundamental for forecasting, planning,
and statistical modeling.
o Integers (Z): The set of signed natural numbers, including
positive numbers, negative numbers, and zero: Z = {…, –3, –2,
–1, 0, 1, 2, 3, …}. Integers can used to represent inventory
adjustments (e.g., –10 units due to damage), net changes in
policyholder count, and year-over-year sales in units. The
inclusion of negative values makes this set ideal for tracking
fluctuations and reversals.
o Rational Numbers (Q): Numbers that can be expressed as

Thus, Q = {x: x = p/q, where p, q ∈ Z and q ≠ 0}. Rational

a fraction of two integers where denominator is non-zero.

numbers are used for representing Claim ratios (e.g., 3 claims

per 10 policies, unit cost (e.g., $2.75 per item), and efficiency
ratios (e.g., 5 deliveries per 8 hours). These values are crucial for
pricing, budgeting, and performance analysis.
o Real Numbers (R): The set of all numbers on the number line,
including both rational and irrational numbers. Real numbers can
be used to measure distances (e.g., 12.5293 km), weights (e.g.,
3.75 tons), and times (e.g., 2.3 hours) with infinite precision. Real
numbers allow for precision and continuity in modeling and
measurement.
o Irrational Numbers (R\Q): These are real numbers
that cannot be expressed as a ratio of two integers. In
other words, they cannot be written in the form p/q,
where p and q are integers and q≠0. Examples include √2, π,
and e. These numbers have non-terminating, non-repeating
decimal positions, making them uncountably infinite within
the set of real numbers R, meaning they are more abundant than
rational numbers.
While irrational numbers are rarely used in their exact form in
day-to-day operations — because infinite precision is not
 practical — they are essential in theoretical modeling and are
typically approximated by rational numbers for computation and
storage. Irrational numbers are useful in modeling continuous
probability distributions (e.g., normal distribution curves),
simulations involving exponential growth or decay, mortality
modeling, and interest formulas involving continuous
compounding. Despite their abstract nature, irrational numbers
are indispensable in advanced mathematical modeling, enabling
analysts and researchers to describe real-world phenomena with
greater accuracy and depth.
o Intervals (subsets of R): These intervals are subsets of the set
of real numbers R, and they come in different forms depending
on whether the endpoints are included.
 Open Interval (a, b): This includes all real numbers
between a and b, but not the endpoints themselves.
For example, (2, 5) includes values like 2.1, 3.5, 4.99, but
not 2 or 5.
 Closed Interval [a, b]: This includes all real numbers
from a to b, including both endpoints. For example,
interval [2, 5] includes 2 and 5 in addition to all the real
numbers between them.
 Half-Open Intervals [a, b) or (a, b]: These include one
endpoint but not the other. For example, [2, 5) includes 2
but not 5.

Consider a logistics company analyzing delivery times. Let the

interval (2, 5) represent delivery durations between 2 and 5
days. This interval includes all delivery times strictly between 2
and 5 days, such as 2.5 or 4.9 days, but excludes exactly 2 or 5
days. This kind of analysis helps in optimizing delivery
performance and setting realistic expectations for customers. For
another example, intervals are used to define age ranges for
insurance premiums, such as [18, 25) for young adult policies.

3. Operations on Sets

Set operations allow us to combine, compare, and analyze relationships

between different sets. These operations are fundamental in mathematics
and are widely used in applied fields like logistics, supply chain
management, actuarial science, and risk analysis.
  Union (A ∪ B): The union of two sets A and B, written as A ∪ B, is the
set of all elements that belong to A, B, or both. It combines the
contents of both sets, removing any duplicates. Let’s say a logistics

{routes with low traffic}. Then, A ∪ B represents all routes that are
company is analyzing two sets: A = {routes under 100 km} and B =

either short, low-traffic, or both. This union helps planners identify all
potentially efficient routes for delivery, regardless of whether the
efficiency comes from distance or traffic conditions.
 Intersection (A ∩ B): The intersection of two sets A and B, written as
A ∩ B, includes only those elements that are common to both sets.
Consider a company evaluating its suppliers partitioned into two sets,
A = {suppliers who deliver on time} and B = {suppliers who meet
quality standards}. Then, A ∩ B = {reliable suppliers} — those who
are both punctual and maintain quality. This intersection helps
procurement teams focus on vendors who meet both the critical
performance criteria.
 Difference (A – B): The difference between two sets A and B, written
as A – B, is the set of elements that are in A but not in B. It helps
isolate unique elements of one set that are not shared with another.
Suppose a financial analyst is reviewing investment options: A =
{assets with high returns} and B = {assets with high risk}. Then, A –
B = {high-return assets that are not high-risk}. This operation helps
identify investments that offer good returns without exposing the
portfolio to excessive risk — a key goal in risk-averse strategies.
 Complement (A′ or Ac): The complement of a set A, written as A′,
includes all elements in the universal set U that are not in A. It
represents the "outside" of a set within a defined universe. Consider an
example from Logistics, where the universal set U be {all delivery
routes}. Let A = {routes with delays}. Then, A′ = {routes without
delays}. This complement helps logistics managers focus on reliable
routes and avoid those that are prone to disruptions. In actuarial
science, if B = {policyholders with claims}, then B′ = {policyholders
with no claims}, which is useful for calculating risk-adjusted premiums.

The set operations are not only mathematically elegant but also immensely
practical. They allow us to filter, combine, and analyze data in meaningful
ways — whether it’s optimizing delivery networks, selecting suppliers,
managing financial portfolios, or assessing insurance risks.

4. Venn Diagrams
Used to visually represent relationships between sets.

 Circles represent sets

 Rectangles represent the universal set

 Overlapping areas show intersections

5. Laws and Properties

A∪B=B∪A
 Commutative Laws:

A∩B=B∩A

(A ∪ B) ∪ C = A ∪ (B ∪ C)
 Associative Laws:

(A ∩ B) ∩ C = A ∩ (B ∩ C)

A∪∅=A
 Identity Laws:

A∩∅=∅

A∪A=A
 Idempotent Laws:

A∩A=A

(A ∪ B)′ = A′ ∩ B′
 De Morgan’s Laws:

(A ∩ B)′ = A′ ∪ B′

6. Collection of Sets (Set of Sets)

A collection of sets, also known as a set of sets, is a mathematical structure

where each element of the collection is itself a set. This concept may sound
abstract at first, but it is incredibly powerful and widely applicable in both
theoretical mathematics and real-world domains like supply chain
management, actuarial science, computer science, and data organization.
A collection of sets is simply a group of sets treated as elements of a larger

Then the collection can be written as: 𝒞 = {A, B, C} = {{1, 2}, {3, 4},
set. For example, if we have three sets: A = {1, 2}, B = {3, 4}, C = {5}.

{5}}. Each element of 𝒞 is itself a set. This structure allows us to organize

and analyze groups of related data in a hierarchical or modular way. Given
that a set can contain finite, countably infinite, or uncountable elements, we
have the following combinations for the collections of sets.
 Finite collection of finite sets: This refers to a structured group of
sets where two conditions are met: first, each individual set contains
a limited number of elements, and second, the total number of
sets in the collection is also finite. This concept is particularly
useful when organizing data that is both bounded and discrete, making
it ideal for applications in business, logistics, and data modeling. For
example, consider a company that works with three suppliers—
denoted as S₁, S₂, and S₃. Each supplier provides a specific list of
products, and each of these lists contains a finite number of items.
Supplier S₁ might offer {Product A, Product B}, S₂ might supply
{Product C, Product D, Product E}, and S₃ might handle {Product F}.
Each of these product lists is a finite set, and the group of all suppliers
forms a finite collection: {S₁, S₂, S₃}. This structure—a finite number of
suppliers, each with a finite product list—is a classic example of
a finite collection of finite sets. It allows businesses to model and
manage their supplier-product relationships efficiently. In actuarial
science, a similar framework might be used to represent a limited
group of insurance policies, each covering a finite set of risks or
benefits. Such models are essential for organizing data, performing
analysis, and making informed decisions.
 Finite collection of countably infinite sets: This refers to a
structure where there are a limited number of sets, and each of those
sets contains an infinite—but countable—number of elements. A set
is countably infinite if its elements can be listed in a sequence, such
as O1,O2,O3,…, even though the list never ends. This concept is
particularly useful in modeling systems that have a fixed number of
components, each capable of handling an unbounded stream of data or
events. For example, consider a retailer that operates four warehouses
W={A,B,C,D}. Each warehouse processes customer orders
continuously throughout the day. While the number of warehouses is
finite (four), the number of orders each warehouse can receive in the
future is potentially infinite. Since each future order can be labeled
sequentially —like O1,O2,O3,… — the set of orders for each warehouse
is countably infinite. Therefore, the retailer’s system can be described

(orders), 𝒪 = {OA,OB,OC,OD} = {{OA1, OA2, OA3,…},{OB1, OB2, OB3,…},

as a finite collection (four warehouses) of countably infinite sets

{OC1, OC2, OC3,…},{OD1, OD2, OD3,…}}, where Oxi represents the i-th
order at the x-th warehouse. This structure is useful in supply chain
modeling, where each node (e.g., warehouse, supplier, or distribution
center) handles a stream of transactions or events. It also appears in
 actuarial science when modeling a fixed number of insurance policies,
each capable of generating an infinite sequence of claims or payments
over time. Understanding this concept helps analysts design scalable
systems, manage data flows, and perform long-term forecasting.
 Finite collection of uncountable sets: This refers to a group of sets
where the number of sets in the collection is finite, but each individual
set contains an uncountable number of elements. These types of
collections are common in applications involving continuous variables
across discrete categories. To illustrate this concept, consider two cold
storage warehouses, each capable of maintaining a wide range of
temperatures. The temperature in each warehouse can be adjusted
continuously and is measured using real numbers. Since the set of real
numbers is uncountable, the range of possible temperatures that each
warehouse can maintain forms an uncountable set. In this example,
the collection consists of two warehouses—a finite number—but each
warehouse represents an uncountable set of temperature values. Thus,
this scenario exemplifies a finite collection (the warehouses) of
uncountable sets (the temperature ranges).
 Countable collection of finite sets: This refers to a collection where
we gather a series of finite sets indexed by a countable parameter,
such as discrete time periods, say days. For instance, imagine
forecasting the demand or sales for four products over an infinite
number of future days. Each day, the forecast consists of a finite set of
values—one for each product. Although the number of products is fixed
and finite, the forecasts are generated daily, and the days form a
countable sequence (like the natural numbers). Therefore, the entire
dataset can be described as a countable collection (days) of finite sets
(daily forecasts for four products).
 Countable collection of countable sets: This refers to a situation
where we gather a series of countably infinite sets indexed by a
countable parameter, such as discrete time periods, say days. For
instance, imagine an Astrophysicist modeling the state space of the
universe by tracking each particle (countable) in time (countable). In
quantitative finance, asset prices can be modeled as discrete-time
stochastic processes. Consider the price of a stock throughout a
trading day. Each trading day can be indexed discretely—Monday,
Tuesday, Wednesday, and so on—forming a countable collection. And,
within each day, the price of the asset fluctuates continuously over
time, from market open to close (e.g., 8:30 AM to 3:00 PM San Antonio
time). If we model time as a discrete measurement (say in seconds),
 then the set of price points within a single day is countable. Thus, we
have a countable collection (trading days) of countable sets (price
values over discrete time measured in seconds).
 Countable collection of uncountable sets: This refers to a series
of uncountable sets (intervals) indexed by a countable parameter (like
days, suppliers, accounts, etc.). In supply chain logistics, especially in
the transportation of temperature-sensitive goods like pharmaceuticals
or food, continuous environmental monitoring is critical. Imagine a
system that tracks the temperature across an entire geographic region
—say, the state of Texas—every day. Each day is a discrete time point
and can be indexed by natural numbers, making the collection of days
countable. However, the temperature data for each day is collected
across a continuous spatial domain. That is, for every point in the
region (latitude and longitude), there is a temperature reading. Since
geographic space is modeled as a continuum, the set of temperature
readings for a single day is uncountable. Therefore, this scenario
represents a countable collection (days) of uncountable sets
(temperature profiles across space). This abstraction is particularly
useful in cold chain logistics, where maintaining precise temperature
control across space and time is essential for product integrity.
 Uncountable collection of finite sets: This represents a situation
where we have uncountably many sets in a collection, and each
individual set contains only a finite number of elements. Let {Aα} α∈I
be a collection of sets indexed by I. If the index set I
is uncountable (e.g., the real numbers), and each set Aα is finite,
then this is called an uncountable collection of finite sets. This
structure is interesting because, although each set is small (finite), the
overall collection is vast (uncountable), and the union of all these sets
may be either countable or uncountable depending on how the sets
overlap.
