CFA Level I · CFA Level I Exam · Simulation of Financial Asset Prices and Returns
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 trials. The number of trials must most likely be multiplied by:
The number of trials must be multiplied by 9. Standard error falls with the square root of the number of trials, so a threefold reduction in error requires a ninefold increase in trials. Tripling the trials would reduce the error by only about 42%.
- A3
- B6
- C9Correct
Explanation
Standard error is proportional to 1/√n. To reduce it to one-third, √n must rise by a factor of 3, so n rises by 9. Multiplying by 3 would cut the error only to about 58% of its level.
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