CFA Level I · CFA Level I Exam · Simulation of Financial Asset Prices and Returns
A Monte Carlo simulation of a call option on a stock uses 10,000 trials. The sample standard deviation of the discounted payoffs is 8.0. The standard error of the estimated option value is closest to:
The standard error is the sample standard deviation divided by the square root of the number of trials: 8.0 divided by 100 equals 0.08. This shows the estimate's precision improves only with the square root of the number of simulation trials.
- A0.08Correct
- B0.80
- C8.00
Explanation
Standard error = s / sqrt(n) = 8.0 / sqrt(10,000) = 8.0 / 100 = 0.08. Choosing 0.80 would come from dividing by sqrt(n) incorrectly as 10; 8.00 ignores the sample size.
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