02_22ans - STAT 410 1 Examples for Spring 2008 Let X be...

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STAT 410 Examples for 02/22/2008 Spring 2008 1. Let X be normally distributed with mean μ and standard deviation σ . Find the moment-generating function of X, M X ( t ). M X ( t ) = E ( e t X ) = ( ) - - - dx x x t e e 2 2 ± 2 1 2 π = ( ) - - + dz z z t e e 2 2 2 1 ± = ( ) - - - + dz t z t t e e 2 2 2 2 2 2 1 ± = 2 2 2 ± t t e + , since ( ) 2 2 2 1 t z e - - is the probability density function of a N ( σ t , 1 ) random variable. 2. Models of the pricing of stock options often make the assumption of a normal distribution. An investor believes that the price of an Burger Queen stock option is a normally distributed random variable with mean $18 and standard deviation $3. He also believes that the price of an Dairy King stock option is a normally distributed random variable with mean $14 and standard deviation $2. Assume the stock options of these two companies are independent. The investor buys 8 shares of Burger Queen stock option and 9 shares of Dairy King stock option. What is the probability that the value of this portfolio will exceed $300? BQ has Normal distribution, μ BQ = $18, σ BQ = $3. DK has Normal distribution, μ DK = $14, σ DK = $2. Value of the portfolio VP = 8 × BQ + 9 × DK.
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Then VP has Normal distribution. μ
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This note was uploaded on 02/11/2011 for the course STAT 410 taught by Professor Monrad during the Spring '08 term at University of Illinois, Urbana Champaign.

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02_22ans - STAT 410 1 Examples for Spring 2008 Let X be...

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