HO11-PS3 - MS&E 352 Handout #11 Decision...

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Unformatted text preview: MS&E 352 Handout #11 Decision Analysis II February 5 th , 2009 ______________________________________________________________________ ______________________________________________________________________ 02/13/06 Page 1 of 5 Problem Set #3 Problem Set #3 Due Friday February 19 th Problem 1 Discretization Practice [30 points] We designed this problem to give you practice in discretizing continuous distributions (here, a Gaussian or normal distribution), as well as to show you the accuracy of the different discretization methods. Willie Wafer, sole proprietor of Big Chip Little Chip Semi Conductors, faces an alternative whose net present value (NPV) has a normal distribution with mean of $0 and standard deviation of 1 million dollars. Willie follows the delta property and has a risk tolerance of 5 million dollars. You will find the cumulative distribution for Willie's alternative on the attached page (You can generate this for yourself using the NORMDIST function in Excel). You will compare the distributions and certain equivalents, which result from the different discretization methods. Question 1: [20 points] Fill out the table on the following page. If you want partial credit, show your work on the moment-matching discretizations on a...
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HO11-PS3 - MS&E 352 Handout #11 Decision...

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