CFA Level I · CFA Level I Exam · Simulation of Financial Asset Prices and Returns
A Monte Carlo analyst increases the number of simulated price paths from 1,000 to 4,000, holding all else constant. The standard error of the estimated mean terminal price will most likely:
The standard error falls to one-half of its prior value. Simulation error is proportional to one over the square root of the number of trials, so quadrupling paths halves it. A fourfold reduction would require sixteen times as many paths.
- Afall to one-half of its prior valueCorrect
- Bfall to one-quarter of its prior value
- Cremain unchanged because the model is the same
Explanation
Standard error of a simulation estimate equals the sample standard deviation divided by the square root of the number of trials. Quadrupling trials divides the error by the square root of 4, which is 2. It does not fall by a factor of 4, and it does change.
Did you get it right without looking?
One question tells you little. A timed set on Simulation of Financial Asset Prices and Returns shows your real accuracy, how long you take and where you lose marks.
More Simulation of Financial Asset Prices and Returns questions
- A Monte Carlo simulation of 10,000 trials gives a sample standard deviation of present value of EUR 40 million for a project. The estimated …
- An analyst wants to estimate the value of a path-dependent exotic option whose payoff depends on the average price of the underlying over it…
- A researcher uses Monte Carlo simulation to value a complex portfolio. Which of the following is the most likely limitation of the result?
- Which statement best describes why an analyst might simulate asset prices using a lognormal model rather than directly modeling prices as no…
- A Monte Carlo simulation models a stock's one-year continuously compounded return as normal with mean 8% and standard deviation 20%. The cur…
- A risk manager wants to cut the standard error of a Monte Carlo estimate to one-third of its current level by only increasing the number of …