FRM Part I · FRM Exam Part I · Simulation and Bootstrapping
A risk manager simulates the one-year payoff of a position using 400 independent trials. The sample mean payoff is USD 5.0 million and the sample standard deviation is USD 6.0 million. What is the standard error of the Monte Carlo estimate of the expected payoff?
The standard error is USD 0.30 million. It equals the sample standard deviation of 6.0 million divided by the square root of 400 trials, which is 20, giving 0.30 million.
- AUSD 0.30 millionCorrect
- BUSD 0.015 million
- CUSD 1.20 million
- DUSD 0.75 million
Explanation
Standard error = s/sqrt(N) = 6.0/sqrt(400) = 6.0/20 = 0.30 million. Dividing by N instead of its square root gives 0.015, which is wrong.
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