Stat400Lec14(Ch4.2,5.3)_ans_part2

# Stat400Lec14(Ch4.2,5.3)_ans_part2 - STAT 400(Chapter 5.3...

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STAT 400 (Chapter 5.3) Spring 2012 1. 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 8shares 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, BQ = \$18, BQ = \$3. DK has Normal distribution, DK = \$14, DK = \$2. Value of the portfolio VP = 8 BQ + 9 DK. Then VP has Normal distribution. VP = 8 BQ + 9 DK = 8 18 + 9 14 = \$270. 2 VP = 8 2 2 BQ + 9 2 2 DK = 64 9 + 81 4 = 900. VP = \$30. P( VP > 300 ) = 30 270 300 Z P = P( Z > 1.00 ) = 1 – 0.8413 = 0.1587 .

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2. A machine fastens plastic screw-on caps onto containers of motor oil. If the
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## This note was uploaded on 03/14/2012 for the course STAT 400 taught by Professor Kim during the Spring '08 term at University of Illinois, Urbana Champaign.

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Stat400Lec14(Ch4.2,5.3)_ans_part2 - STAT 400(Chapter 5.3...

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