Explain how a monte carlo simulation could facilitate

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Q. A decision maker is working on a problem that requires her to study the uncertainty surrounding the payoff of an investment. There are 3 possible levels of payoff -$1,000, $5,000 and $10,000. As a rough approximation, the decision maker believes that each possible payoff is equally likely. But she is not fully comfortable with the assessment that each probability is exactly 1/3 and so would like to conduct a sensitivity analysis. In fact, she believes that each probability could range from 0 to ½.

1. Explain how a Monte Carlo simulation could facilitate a sensitivity analysis of the probabilities of the payoff

2. Assume the decision maker is willing to say that each of the 3 probabilities could be chosen from a uniform distribution among 0 and 1. Could you incorporate this information into your simulation? If so, explain how? If not, explain why not or illustrate what additional information you would need.

Reference no: EM1374059

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