STAT 400 hw6_ans - STAT 400 Spring 2012 Homework #6 (10...

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STAT 400 Spring 2012 Homework #6 (10 points) (due Friday, Mar 9th, by 3:00 p.m.) No credit will be given without supporting work. 1. The “fill” problem is important in many industries, such as those making cereal, toothpaste, beer, and so on. If an industry claims that it is selling 12 ounces of its product in a container, it must have a mean greater than 12 ounces, or else FDA will crack down, although the FDA will allow a very small percentage of the containers to have less than 12 ounces. a) If the content X of a container has a N(12.1, 2 ) distribution, find such that P ( X < 12 ) = 0.01. = 12.1, = ? Know P ( X < 12 ) = 0.01. Find z such that P( Z < z ) = 0.01. z= – 2.33 (Table Vb p585) x = + z . 12 = 12.1 + ( 2.33 ). = 0.043 ounce . b) If the content X of a container has a N( ,  2 ) distribution, find such that P ( X < 12 ) = 0.01. = ?, = 0.05 Know P ( X < 12 ) = 0.01. Find z such that P( Z < z ) = 0.01. From a), know that z= – 2.33. x = + z . 12 = +  ( 2.33 ). = 12.1165 ounce .
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2. Models of the pricing of stock options often make the assumption of a normal distribution. An analyst believes that the price of an Initech stock option varies from day to day according to normal distribution with mean $9.22 and unknown standard deviation. a) The analyst also believes that 77% of the time the price of the option is greater than $7.00. Find the standard deviation of the price of the option. = 9.22, = ? Know P( X > 7.00 ) = 0.77. Find z such that P( Z > z ) = 0.77. ( z ) = 1 – 0.77 = 0.23 . z = 0.74 . x = + z . 7.00 = 9.22 + ( 0.74 ). = $ 3.00 . b) Find the proportion of days when the price of the option is greater than $10.00 ? P( X > 10.00 ) = 00 3 22 9 00 10 P . . . Z = P( Z > 0.26 ) = 1 – ( 0.26 ) = 1 0.6026 = 0.3974 . c) Following the famous “buy low, sell high” principle, the analyst recommends buying Initech stock option if the price falls into the lowest 14% of the price distribution, and selling if the price rises into the highest 9% of the distribution. Mr. Statman doesn’t know much about history, doesn’t know much about biology, doesn’t know much about statistics, but he does want to be rich someday. Help Mr. Statman find the price below which he should buy Initech stock option and the price above which he should sell.
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Need x = ? such that P( X < x ) = 0.14. Find z such that P( Z < z ) = 0.14. The area to the left is 0.14 = ( z ). z = 1.08 . x = + z . x = 9.22 + 3 ( 1.08 ) = $5.98 . Buy if the price is below
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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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STAT 400 hw6_ans - STAT 400 Spring 2012 Homework #6 (10...

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