CFA Level I · CFA Level I Exam · Simulation of Financial Asset Prices and Returns
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 mean present value is EUR 12.0 million. The standard error of the mean estimate is closest to:
The standard error is about EUR 0.40 million. It equals the sample standard deviation of EUR 40 million divided by the square root of 10,000 trials, which is 100. The mean of EUR 12.0 million is irrelevant to this calculation.
- AEUR 0.12 million
- BEUR 0.40 millionCorrect
- CEUR 4.00 million
Explanation
Standard error = s/sqrt(n) = 40/sqrt(10,000) = 40/100 = EUR 0.40 million. EUR 0.12 million wrongly uses the mean divided by 100 (12/100). EUR 4.00 million divides by 10 (sqrt of 100) instead of 100.
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
- An analyst wants to estimate the value of a path-dependent option whose payoff depends on the average price of the underlying over its life.…
- A pension fund uses simulation to assess whether its assets will cover future liabilities under many interest rate and return scenarios. A k…
- An analyst simulates a stock price using a geometric Brownian motion model in which the continuously compounded return over each step is nor…
- In a Monte Carlo simulation, an analyst wants to cut the standard error of the estimated mean by half. Holding other inputs constant, the nu…
- Compared with parametric Monte Carlo simulation, a key advantage of bootstrap resampling is that it most likely:
- An analyst uses Monte Carlo simulation to estimate the value of a portfolio under stress. Which of the following is the most likely limitati…