CFA Level I · CFA Level I Exam · Simulation of Financial Asset Prices and Returns
A Monte Carlo simulation of a project's net present value produces 10,000 trials with a sample mean of 4.0 million and a sample standard deviation of 3.0 million. The standard error of the estimated mean NPV is closest to:
The standard error is about 0.03 million. It equals the sample standard deviation of 3.0 million divided by the square root of 10,000 trials, which is 100. The standard deviation of 3.0 million describes spread across trials, not the precision of the mean estimate.
- A0.03 millionCorrect
- B0.30 million
- C3.00 million
Explanation
Standard error = s/√n = 3.0/√10,000 = 3.0/100 = 0.03 million. The 0.30 figure would result from using n = 100, and 3.00 is the standard deviation itself, ignoring the sample size.
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